Why index heavyweights Infosys, HDFC Bank slumped

It was a manic Monday for the Indian stock markets with IT stocks like Infosys leading the rout, as the benchmark indices ended the day more than 2% in the red. 

Shares of Infosys witnessed their steepest fall in the last two years, with the counter falling more than 7.2% to end the day close to Rs 1,600 levels. 

The other major index heavyweight that saw its shares nosedive was HDFC Bank, which ended the day more than 4.6% down from its previous close on Thursday. 

This meant a double whammy for the Sensex and the Nifty, as the two stocks hold a nearly 18% weightage in the benchmark indices. 

But what dragged these two heavyweights down?  

The fourth-quarter results for both these counters were disappointing. Infosys on April 13 after-market hours reported 12% year-on-year growth in net profit at Rs 5,686 crore in Q4 while HDFC Bank on April 15 announced that its standalone net profit jumped 22.8% to Rs 10,055.2 crore for the quarter ended March 31, 2022.

However, the bank’s operating profit grew just 10.2% and its net interest margin hit a record low of 4%.

Stock markets were closed on April 14 and April 15 on account of public holidays.

What had the brokerages said about the two companies, ahead of their respective results?

Kotak Securities projected a profit of Rs 10,478.20 crore for HDFC Bank and Rs 5,754.40 crore for Infosys. ICICI Securities said Infosys’ numbers were below expectations as it maintained a ‘Hold’ rating with a price target of Rs 2,000.

Morgan Stanley has cut its FY23 and FY24 EPS estimates for Infosys by 2-3% and now sees the stock at Rs 1,970 against Rs 2,050 earlier. JPMorgan has cut its earnings estimates by 5-7% and has a target of Rs 2,200 against Rs 2,300 earlier. Jefferies has trimmed its target to Rs 2,050 from Rs 2,135 citing 3-6% cut in earnings estimates.

But CLSA maintained a buy rating on Infosys with a target price of Rs 2,040. “Infosys’ dream run paused Q4FY22 as a client-specific situation affected the revenue momentum, and thereby margins. While demand tailwinds should bring the revenue growth back on track soon – 13-15% constant currency YoY revenue growth guidance for FY23 was ahead of expectations – margin recovery may take time given persistent supply-side pressures,” CLSA said. 

Nomura India said FY23 revenue guidance for Infosys was ahead of market estimates but margin guidance at 21-23% fell short of expectations.

The March quarter numbers, it said, disappointed on most parameters, with revenue growth at 1.2% sequentially in constant currency terms, missing the consensus estimate of 3% growth partly due to a one-off client-specific issue.

But are Infosys’ woes limited just to bad numbers?

Not really. As a Bloomberg report points out, the company, once the poster boy of globalisation, is now facing political headwinds, especially related to the Russian invasion of Ukraine. 

The company has a significant presence across Russia, the US and Europe. It has so far refused to shut its operations in Russia, which is facing sanctions from the US and the European Union. 

The company is facing heat over the fact that its co-founder NR Narayan Murthy’s daughter and shareholder Akshata, married to UK chancellor of the exchequer Rishi Sunak, holds non-dom status (which means that her overseas earnings are shielded from UK taxes). This has caused a controversy that is also threatening to take the political career of her husband down. 

At the same time, Infosys’s refusal to close its Moscow offices, as companies like Oracle Corp. and Microsoft Corp. did to protest against Russia’s invasion of Ukraine, led to accusations that she was living off “blood money,” the Bloomberg report noted. 

Her brother, Rohan, is also caught up in a row revolving around his funding of a library of classical Sanskrit literature at Harvard University. 

Moreover, the company has been getting flak from the government on a much delayed and botched up upgrade of the income tax portal, which delayed the filing process last year, drawing the ire also of the Rashtriya Swayamsevak Sangh, which accused Infosys of trying to undermine the Narendra Modi government.