Infosys Q4 revenue to take 130bps hit; FY21 outlook gloomy: Analyst report

•     130 bps hit in Q4 FY20, FY20 revenue growth at 8.6 %.

•     Y- O-Y revenue growth for FY21 estimated at 2.9%

•     FY21 operating margins estimated to decline by 150bps

Coronavirus-triggered crisis could shave off 1.3% of Infosys's revenue in the fourth quarter, according to a research note by BMO Capital Markets. Analyst Keith Bachman in the report says they are lowering revenue as well as operating margins estimates for Infosys for both Q4 of FY20 as well as FY21.

The note details the impact of Covid-19 and the supply and demand challenges for all IT sector companies. "We decreased our 4Q20 revenue growth estimate by 130 basis points, which lowers our FY20 revenue growth estimate by 40 basis points (9 per cent year on year to 8.6 per cent year on year)," the research note says.

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The larger impact of revenue estimate changes will be for FY21 with the earlier estimated annual revenue growth of 7.2%, lowered to 2.9%, the report adds.  The note further says, "We estimate -5.5 point drop in the 1Q21 quarter, followed by less growth in 2Q21 and 3Q21, before a return to normal growth in 4Q21 at 7% y/y".

The research note also mentions the operating margins of the company can take a further hit of 30bps, coming in at 21.4 per cent for FY20 compared to the earlier estimates of 21.4%. However the bigger impact will be for  FY21 where margins are estimated to be down by 150 bps compared to the earlier estimates of 60 bps .

Infosys Ltd revised its annual revenue guidance to 10%-10.5% (constant currency) at the end of the third quarter of FY20. "The way we have looked at the guidance is, given the strength we have had in the first three quarters of the year and the current pipeline, deal convergence and the revenue outlook we see internally for Q4, we felt comfortable to raise our guidance for the full year and also narrow the band," said Salil Parekh, CEO & MD in the earnings call. While the company revised its revenue guidance, the operating margin guidance for FY20 has been maintained in the band of 21%-23% .

The BMO Capital Markets note states that estimates for each business segment of Infosys is seen lower. Specifically, retail segment estimated to be in the negative for the next three months.  BFSI segment, which is s over 30% of the company's revenue, has seen some softness over the past.

In the quarterly earnings call Pravin Rao, COO said, "We have seen more than anticipated furlough impact in Europe and Rest of the World. However on the positive side, we have seen some growth in banking in North America. So it has been a mixed bag". But with the pandemic's firm grip over US and its financial capital New York among the worst hit, a big percentage of large deal wins from this space which the company witnessed could negatively impact Infy's deal pipeline.

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