Why Infosys Share Price is Falling

Editor's note: 'Out of the frying pan and into the fire.'

This idiom is often used to explain a situation where more troubles seep in on an existing troublesome situation. The proverb precisely explains the plight of one of India's largest IT companies - Infosys.

In the past few days, Infosys share was under pressure because the market was expecting the company to report a weak Q4 show.

As expected, Infosys reported disappointing set of numbers, way below their financial year 2023 guidance. The company reported the worst decline in a decade in constant currency growth. Resultantly, the margins have seen a decline.

The company failed to meet market expectations. The company saw an unplanned ramp-down in projects across business verticals due to the fickle market sentiment.

Even before quarterly results, Infosys share price was in pressure because of the global banking crisis.

Last month, the global banking crisis that started with the SVB collapse brought Indian IT companies under trouble. The crisis has an indirect impact on Tier-I IT companies.

The banking, financial services, and insurance (BFSI) segment is the largest vertical for Indian IT services companies, contributing significantly to their revenue. As of Q3 for the financial year 2023 Infosys earned 34.9% revenue from the BFSI segment.

Due to the banking crisis there is a high possibility of cost-cutting measure in the BFSI segment which might significantly impact the company's revenues.

Also, the collapse of large banking institutions may not only lead to a reduction in existing business but it reduces tech spending in the future along with delayed deal closures.

However, Infosys share price was under pressure long before this. In March 2023, we wrote to you in detail explaining about the same. Continue reading...

Why Infosys Share Price is Falling

Back-to-back exit of top-level employees is turning out a major concern for Infosys investors.

Two of the company's top-level executives with over 20 years of work experience, left the company.

This has escalated a negative sentiment in the management's ability to retain the talent, triggering a selloff in the stock.

The year 2022 turned many of the market's erstwhile darlings into duds.

For a major part of the preceding decade, investors flocked to fast-growing technology businesses, whose impressive gains year after year reinforced assumptions that they had nowhere to go but up.

The soaring prices of meta stocks and tech stocks boosted key indices to historic levels.

But the tide turned in 2022, making it the worst year since the 2008 global financial crisis.

This tech onslaught continues in 2023. With just six days into 2023, the tech stocks have shown a decline of up to 4%. The shares of the second largest IT company in India have eroded by 3.3% in six days.

Here is why Infosys' share price has taken a beating.

#1 Global recession concern

The US Federal Reserve has ramped up its fight against decades-high inflation. Post the meeting on 14 December 2022 Fed carried out its fifth-rate hike for 2022 by half a percentage, bringing the interest rate into a targeted range between 4.25% and 4.5%.

According to the minutes of this meeting, released on 4 January 2023, the Fed is determined to fight inflation and expects higher interest rates to exist until inflation is abated, to the American Central bank's 2% goal.

With this increasing interest rate, many economists have predicted a US recession within the next 12 months.

Most IT companies in India have high exposure to the US and European nations, as they contribute to around 86% of their revenues, according to a CRISIL report.

This rising interest rate has hurt sentiment, and companies like TCS, and Infosys, among others, depend on US and Europe countries for their revenue generation.

Due to this, following the hawkish reading of Fed minutes, tech stocks in India have seen a decline in line following a fall in the Nasdaq.

Update: #2 Consecutive top-level resignations

On 11 March 2023, the company announced the resignation of its President, Mohit Joshi, who spent over 22 years at the company.

Under Joshi, Infosys BFSI vertical delivered a compounded annual growth rate of 9% over the financial years 2016 to 2022. His departure has posed a near-term risk.

Moreover, in less than six months, Infosys has lost two presidents, Ravi Kumar S and Mohit Joshi, to rival IT firms Cognizant Technology Solutions Corporation and Tech Mahindra. Both of them had been with the company for at least two decades each.

This is concerning and elevates the risk of attrition in the mid and senior levels over the next few quarters to both of its competitors, creating a negative sentiment.

Muted outlook for upcoming quarters

Infosys has fixed 12 January 2023 as the date to consider and approve the audited standalone and consolidated financial results for the December 2022 quarter.

For the September 2022 quarter, the company reported a 23.4% YoY jump in consolidated revenue and a 11% YoY jump in net profit. This was on the back of a robust order book.

However, despite lower project attrition, margins of the company remained under pressure due to salary hikes and inability to pass the increased employee costs to customers.

The company's gross margin fell to 29.8% down from 31.1% in the same period last year. Net profit margin fell to 19.8%, down from 21.5%.

Analysts expect this margin pressure to continue further for the next couple of quarters.

They further expect the revenue growth of the company to remain moderate due to increased cautiousness among clients on the back of macro uncertainties.

Update: Infosys, on 13 April 2023, reported an 8% year-on-year (YoY) growth in consolidated net profit for the quarter ended March 2023 at Rs 61.3 billion (bn). Meanwhile, consolidated revenue for the period increased by 16% YoY to Rs 374.4 bn.

Sequentially, the company's net profit in the March 2023 quarter fell by 7% while sales dropped marginally.

The company's operating margin contracted by 50 basis points sequentially to 21%.

How Infosys shares have performed recently

Infosys shares have declined by more than 9% in a month. Over the year, the stock is down more than 20% due to massive selloff in tech stocks.

The company touched its 52-week high of Rs 1,953.9 on 12 January 2022 and its 52-week low of Rs 1,355 on 22 September 2022.

At the current price, the stock is trading at a PE multiple of 27.9 and a price-to-book value multiple of 8.4.

About Infosys

Infosys is a large Indian IT services company, offering a range of digital and traditional IT services.

From humble beginnings in 1981, the company now counts itself among the largest and most respected global software firms. It's known around the world for its quality management, work ethics and corporate governance standards.

The company caters to industry verticals such as financial services, retail, communication, manufacturing, hi-tech, life sciences, energy, utilities, resources, and services.

For more details about the company, you can have a look at Infosys company factsheet and quarterly results on our website.

Also check out the detailed comparison editorial on Infosys vs TCS: which IT stock is better?

Meanwhile, you can even compare Infosys with other peers here.

Infosys vs TCS

Infosys vs Wipro

Infosys vs HCL Tech

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...