Infy margins: Analysts coy on Brexit impact

Analysts are concerned over the impact of Brexit on Infosys, and performance in certain key verticals like insurance, healthcare and retail, all of which could further push margins down.

As India’s second-largest exporter looks to report its first quarter numbers for the 2017 fiscal year on July 15, a day after TCS, analysts are keeping a close watch on the management commentary post-Brexit.

According to Ashish Chopra, analyst at Motilal Oswal, the (Brexit) development comes at a time when the macro-economic scenario globally is not firing on all cylinders. Also, IT spending in the last few years has largely remained flat and in some instances gone down, which has added to IT exporters’ woes. It is in this backdrop that analysts are left worried.

“The single largest doubt for UK-based banks is their ability to borrow and service debt amidst the onset of a potential GBP crisis, in addition to concerns over the UK’s economy and the impact on employment, all of which affect spending decisions,” Chopra added.

Others like Urmil Shah, analyst at IDBI Capital, point out that this in turn could impact the BFSI (Banking, Financial Services and Insurance) segment of Infosys, as the clients are of global nature.

So, what could be the material impact?

While most brokerages are awaiting management commentary on this, some like Kotak Institutional Equities have cut revenue growth rate by 0.6-1.2 per cent to build in any sort of Brexit impact.

Overall, Infosys is expected to post 4.2 per cent sequential growth, in line with the strong revenue growth that is has been posting for the last several quarters.

However, margins have been a cause of concern, even without Brexit, and other seasonal issues such as wage and visa costs, which typically kick in the first quarter. “We see 100-160 basis points quarter-on-quarter decline in profitability,” said Chopra. Infosys exited 2016 with 25.5 per cent EBIT margins and gets around 10 per cent of its revenues from the UK. Overall, these business verticals contributed 28.1 per cent to Infosys’ revenues in the previous quarter. Then, there is the issue of the pound weakening more than 10 per cent against the dollar and the rupee having appreciated 1 per cent since the last few days.

Madhu Babu, IT analyst at Centrum Broking, pointed out that cross-currency movements will be a tailwind and will hence have an impact on dollar revenues by 20-40 basis points (0.2-0.4 per cent). Infosys does not give out the amount it has hedged in the pound.

Others in the industry like Sandeep Aggarwal, former CFO of Intelenet, which has a large presence in the UK, firmly believes that a lot of projects will be put on hold and will herald pricing pressures going forward.