Expect Infy to cut dollar revenue guidance to 7-8%: IIFL

Infosys currently expects 10% growth in revenue in dollar terms, but Muthangi believes it will actually come in around 7-8%. “Given the very sharp growth rate needed and the lackluster demand environment, they will be downgrading the yearly guidance to more reasonable number somewhere around 7-8% at the top end,” he told CNBC-TV18.

He goes on to say that he doesn’t expect to see any valuation derating or downgrades from analysts if Infosys goes ahead and cut FY13 guidance. This is because he expects the company to announce massive hikes to their rupee growth guidance and their rupee EPS. “I expect the EPS to be upgraded from the guided range of about Rs 160 to about Rs 180 this quarter,” he added.

Last quarter, the market was hurt by Infosys’ guidance numbers, which were below NASSCOM’s expectations. NASSCOM forecasts 11-12% growth this financial year, and the street did not take it lightly that India’s leading IT services firm expected to grow below that.

Meanwhile, Muthangi says TCS is expected to grow 4.5% in constant currency in Q1, and that dollar revenue guidance will be 14%.

He believe IT firms can post revenue growth in the mid-teens, but only over the medium term.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Before we talk of the results, there has been a buzz in the market that Infosys might go in for a buyback. Is it in the expectation radar?

A: We don’t comment on speculation rumor. Obviously there has been no announcement from the company management on the buyback, so I will leave at that.

Q: Have you guys scaled on dollar revenue guidance expectations or do you expect the management to?

A: On the dollar revenue, the guidance this quarter is about 1% in dollar terms, but they will have to battle cross currency headwinds during the quarter. Infosys will have lesser cross currency headwinds because of lower exposure to emerging markets, so we expect about 0.5% or 50 basis point headwinds from the cross currency. We are estimating Infosys to deliver about 0.5% growth in dollar terms and 1% growth in constant currency terms.

The real issue will be whether they will be downgrading the yearly guidance or not. For the year they have guided about 10% year on year revenue growth in dollar terms, but as the cross currency will take about 1%, that would technically bring down the revenue guidance to about 9%. But then there is another issue which I believe is the very sharp growth that they expect during Q2 and Q4; the arithmetic would turn out to be about 4.8% growth every quarter from Q2 to Q4. I am a bit more conservative than that. I assume that given the very sharp growth rate needed and the lackluster demand environment, they will be downgrading the yearly guidance to more reasonable number somewhere around 7-8% at the top end.

Q: What ramifications would that have for the kind of valuation band Infosys has traditionally enjoyed? If indeed it comes to the yearly guidance being downgraded as you suggest, what do you think happens to the valuations that Infosys has traditionally enjoyed?

A: That’s an interesting question because this year we have another big tailwind for Indian IT vendors. Even though they will downgrade the yearly dollar guidance, they are going to upgrade the rupee EPS and the rupee revenue guidance massively. This quarter itself rupee has depreciated by about 8% against the dollar. This is a huge tailwind for the margins and for the EPS. So what will happen is the guidance for the margin is about 200 bps down quarter on quarter, but I estimate the margins will actually be up 50 bps and that will drive massive EPS upgrades from the company also.

I expect the EPS to be upgraded from the guided range of about Rs 160 to about Rs 180 this quarter. So, perhaps I don’t see a valuation de-rating on the back of a revenue dollar guidance downgrade itself. I think that is in the expectations also. So most of the consensus is anyway building in and I have been building in about an 8% revenue growth since they have given the guidance during Q4 itself. So, per se I don’t think this downward revision from Infosys will lead to a downgrade of estimates from analysts.

Read on to find out IIFL's views on HCL Tech..