Why Infosys Share Price is Falling

As I write this, the Nasdaq Composite Index is down 27% from its peak in mid-November 2021. The index is currently trading August 2020 levels.

This US stock market index is the most widely tracked measure of tech stock prices.

Mirroring the trend on Nasdaq, Indian IT stocks have slumped sharply. The top Indian IT companies Infosys, Wipro, and Tech Mahindra have fallen around 30-40% this year.

Infosys in particular, has seen a sharp selloff in recent days.

Let's take a look at the probable reasons for this fall.

#1 Mirroring the Nasdaq index

62%!

That's how much the top US tech stocks have fallen from their 52-week highs this year. Take a look at the chart below.

When it comes to the Indian IT sector, IT stocks follow the same pattern in most cases. When the Nasdaq index declines, Indian IT indexes mirror the trend next day and see a decline.

Take the most recent example.

On Tuesday, 13 September 2022, the US stock market crashed following higher than expected inflation numbers. The Nasdaq index was down over 5% that day. It was the biggest single day fall since 2020.

Although the headline inflation rate in the US seems to have peaked out, the investors are still worried about inflation and its effects.

Now, the very next day, the BSE IT index fell over 1,000 points, or more than 3%. This is no rare occurrence but has happened multiple times.

So, one reason for Infosys share price being in the dumps is because of a slump in US tech stocks. This is what you can learn from the massive selloff in US tech stocks.

#2 Operating margins under pressure

In the most recent June 2022 quarter, Infosys' margins fell 150 basis points sequentially to 20.1%, dragged down by salary hikes.

The IT major has not shied away and has provided a cautionary note that margins will remain at the lower end in the near term due to wage pressure.

This is what the company had said in an earnings call:

• Cost optimization measures will kick in, utilization, pricing automation among others as we go ahead, so we are confident that margins are at the bottom-end.

Rating agency ICRA recently said that there will be a moderation in the revenue growth and operating profit margins for Indian IT companies.

The company had however maintained its guidance for operating margin at 21-23% for the ongoing financial year.

It's not just Infosys, but a majority of IT companies have faced this issue. Infosys has cut its variable pay to 70% amid the margin squeeze and high employee costs.

Variable payout is the compensation given to employees based on their contribution beyond their normal job requirements. It's primarily based on two factors - employee performance and the company's performance.

Indian IT companies are worried that tightening budgets at US and European clients bracing for a recession, will sharply hit their own profits after a pandemic-led boom.

#3 High attrition and recession concerns

As the Federal Reserve ramps up its fight against inflation, a growing movement of economists predicts a global recession.

At a time when the US market is experiencing a fear of recession, Indian market is unlikely to escape the headwinds.

Another problem hurting Infosys is the high attrition rate. Infosys recorded an attrition rate of 28.4% for the June quarter, up from 27.7% sequentially.

This was the highest attrition rate among the top Indian IT companies.

While companies are hiring a record number of freshers, it takes months to train and deploy new employees. That is why many companies are also hiring experienced employees and paying higher salaries and giving differential treatment to the top performers.

#4 Dollar revenue growth to slow down?

Adding insult to the injury, global brokerage Goldman Sachs recently downgraded Indian IT stocks including Infosys pertaining to a sharp cut in dollar revenue growth.

Here's what the brokerage said in a note:

• Given the upcoming macro slowdown (not recession), which is percolating down multiple leading demand indicators, we believe Indian IT sector's dollar revenue growth will start to materially slowdown from here, weighing on the secular tailwinds.

A downgrade usually sends the stock lower for the next few days and dampens sentiment for the entire sector. Infosys had slumped 4.5% post this downgrade and still continues to remain under pressure.

Infosys to report results soon

Infosys has fixed 13 October 2022 as the date to consider and approve the audited standalone and consolidated financial results for the quarter and half year ending 30 September 2022 (Q2 results).

In the same meeting, the board will also consider declaration of interim dividend, if any.

Did you know that Infosys has stakes in some of the most exciting unlisted companies?

Infosys share price performance

On a YTD basis, Infosys share price has fallen 26%.

As Indian share markets recovered from the June 2022 lows, Infosys followed suit and touched a high of Rs 1,619 last month.

However, it has fallen around 14% from those highs and currently trades at Rs 1,398.

Infosys has a 52-week high of Rs 1,954 touched in January this year and a 52-week low of Rs 1,367 touched on 17 June 2022.

Infosys trades at a PE ratio of 26.4 times and a price to book multiple of 7.5 times.

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

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...