Infosys Shares 7% drop hints at further weakness for tech counters

Mumbai: Investors in Infosys could brace for more weakness in its share price after the 7% drop on Monday - the largest single-day fall since March 23, 2020 - as analysts are cutting earnings estimates for companies in the sector in the face of rising cost pressures. The stock closed at ₹1,621.45 - its lowest in eight months - dragging down shares of other software service exporters.

Fund managers and analysts said it will be premature to make fresh purchases of Infosys and other information technology (IT) stocks at the moment.

"More de-rating is possible. Infosys is a popular as well as over-owned stock," said Hemang Jani, head of equity strategy-broking and distribution at Motilal Oswal. "The underperformance in such a stock can be more in a corrective phase like this."

The sell-off on Monday led to Infosys' market value eroding by ₹53,500 crore. The Bengaluru-based company's earnings disappointment came on the heels of a lower than expected March quarter result by Mumbai-headquartered Tata Consultancy Services (TCS).

Fund managers said share valuations of large-cap IT companies are still pricey.

"IT stocks are still trading above their long-term average valuations after the re-rating over the past couple of years," Mahesh Patil, CIO, Aditya Birla Sun Life AMC. "So, there is limited room for valuation upsides and now with margin pressures building there are chances of some derating of multiples from these levels."

Brokerages have cut target price on Infosys by up to 7% post its earnings. Jefferies trimmed target price to ₹2,050 from ₹2,135 and Morgan Stanley cut target price to ₹1,970 from ₹2,050.

"Margins could improve in the second half of FY23 and FY24. The current weakness is a good time to accumulate the stock," said Neerav Dalal, research analyst at Maybank Kim Eng Securities. Dalal had lowered target price on Infosys by 5% to ₹2,070.

Analysts said the company's earnings missed expectations due to muted growth of 1.2% quarter on quarter in constant currency. Attrition worsened to 27.7% in the March quarter from 25.5% in the previous quarter.

Bloomberg estimates show that 38 analysts have a 'buy' rating on Infosys, seven analysts have a 'hold' recommendation while four recommend a 'sell'. The consensus target price is ₹2,008, according to Bloomberg.

Unlike in the past when investors moved from Infosys to TCS in the event of weak earnings, a shift of a similar nature is unlikely this time, said brokers

"People will not move from Infosys to TCS but they may move from IT to other sectors such as banking. Midcap IT stocks have corrected but the overall risk within IT still remains more in midcaps," said Jani.