Sandip Agarwal, AVP, Edelweiss Securities

Salil Parekh has refreshed Infosys’ strategic direction. He is focusing on scaling the agile digital business, energising core via AI and automation, re-skilling employees and expanding localisation. Investments towards digital, increasing localisation in light of the H1-B visa issue, the impairment loss from selling of the Skava and Panaya businesses, as also the special dividend, are dragging down margins in the near-term. Still, Infosys is our top pick in the IT space as we expect it to deliver better profitability and growth over the long-term. The investment in digital would help it increase its share in the global outsourcing market. Overall, we are seeing a strong deal environment led by digital and pent-up demand from brick-and-mortar retail players. We expect Infosys’ margins to bottom-out by Q2FY19. While we have cut EPS estimates for FY19 by 0.7% and by 4.2% for FY20, the valuations look attractive as the stock trades at 15.8x one-year forward earnings estimates.

Ravi Menon, IT analyst, Elara Capital

Infosys’ new EBIT guidance band confirms our fears that the firm is running out of margin levers after exhausting utilisation and G&A control. Infosys has deployed a lot of fresh graduates over the last year, so there is limited scope for cost improvement by way of hiring fresh graduates with lower wages as compared to experienced IT personnel. While sales and marketing investments were 4.5% ahead of our estimates, it was offset by G&A expenses. Infosys has been increasing the offshore component despite management comments regarding increasing localisation. We are not sure at what point the offshore shift will stop but once it starts reversing, margins will be impacted. The decision to divest Panaya and Skava suggest that the commitment to platforms strategy is wavering. This raises questions over credibility, which may end up creating friction among clients. We reiterate to reduce and urge investors to switch to TCS, HCL and Wipro in IT large cap.