Stock Call. Why Infosys is an attractive defensive play

The market volatility caused by Covid-19 pandemic has led to many bluechip stocks correcting to attractive valuations. Infosys fell to a low of ₹509 in the past few days, a level last seen two years ago, but has recovered since.

The market has priced in the weakness in revenue growth for FY2020-21 as many of the company’s clients, including Visa, Apple and Cisco, have either cut or revised down their revenue guidances.

This will have an impact on Infosys as some deals the company had bagged will now take longer to get operationalised.

The stock is now trading at a 12-month trailing price earnings multiple of 18 times, which is close to its three-year average price earnings multiple.

For a long-term investor willing to weather short-term volatility, the correction over the past month (of 12-odd per cent) offers a good opportunity to accumulate the stock over the coming months. The company also has a decent dividend yield of around 3 per cent.

Before Covid-19

The company was under a cloud over whistle-blower complaints sometime ago. The cloud has been cleared, but now the pandemic has weighed heavy on the stock. Investigations into the whistle-blower complaint accusing the management of wrongdoing in preparation of its financial statements had impacted the stock price.

These probes and another one by the US Securities Exchange Commission cleared the management of any wrongdoing. This bodes well for the future.

Before coronavirus hit the world and dampened the outlook for an already weak global economy, Infosys had reported good quarterly results for the quarter ended December 2019.

The company’s deal pipeline is decent. It bagged large deals worth $7.3 billion during the first nine months of 2019-20, which is 56 per cent higher than in the same period in the previous year.

This shows the company has a decent pipeline of deals, which gives revenue visibility in the near term.

Revenues during the quarter ended December 2019 grew 1 per cent quarter-on-quarter in constant currency terms to $3.2 billion. The company had upped its constant currency revenue guidance for 2019-20 to 10.0-10.5 per cent from 9-10 per cent. This was the second time it had upped its revenue guidance.

Infosys’ net profit for the nine months ended December 2019 came in at ₹12,304 crore, up 8.6 per cent from the same period a year ago.

For the nine months ended December 2019, the company’s revenues were up nearly 10 per cent to $9.5 billion. And revenue from digital services make up over 40 per cent of this.

The company was on course to post double-digit revenue growth in constant currency terms; its competitor TCS was struggling to achieve this, even before the pandemic. Only HCL Technologies, among the other large Indian IT services companies, was poised to post double-digit revenue growth in 2019-20 before the Covid-19 outbreak.

Infosys also managed to report margins within its guided range ( 21-23 per cent) during the December quarter.

Covid-19 impact

As State governments in India have ordered private establishments to shut their offices, the first impact of the pandemic would be managing employees working from home. There could also be an impact on project delivery to some extent, though employees in the IT sector are more adept than others in working remotely.

Travel curbs on employees will also have an effect. Employees, both on the technical and the sales side, usually travel to meet clients. Although this can be done through remote working solutions to some extent, the disruption can cause problems in project delivery and, in turn, revenues. On the other hand, travel costs will come down and could positively impact the company’s margins.

Clients could tighten their purse strings because of the impact of the pandemic on their revenues. There could be disruption in acquiring new deals and also operationalising the deals the company had signed. This will impact Infosys’ revenue in the first couple of quarters of CY2020.

This is, however, likely to taper by the end of 2020, and the revenue can return to normal levels.

The fact that the US government has passed a $2- trillion stimulus package to help businesses in the US, bodes well for Infosys.

European countries are also unveiling monetary and fiscal stimulus to revive the economy from the impact of the pandemic. Once these take effect, Infosys’ clients are likely to resume their technology spend.

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