Infosys, one of the main laggard of 2012, will release its Q3 results tomorrow. In an interview to CNBC-TV18, Abhishek Shindadkar of ICICI Direct said he expects the tier 1 IT pack to report around 2-3 percent of dollar growth, led by modest currency gains and weak volumes
On Infy in particular, Shindadkar expects the full year guidance at around 3 percent, led by contribution from Lodestone. "Lodestone should add around two to two-and-half months of revenue for the current quarter. So it would be a modest 0.5-1 percent sequential growth. Including the acquisition, it could be roughly around 2.5-3 percent,” he said.
Below is an edited transcript of Abhishek Shindadkar’s interview on CNBC-TV18
Q: What is the street expectation this time around from Infosys? Will it be very much like the Q2 performance?
A: I think the street expectation is pretty much what we are expecting which is that the tier 1 pack could report around 2-3 percent of dollar growth, led by modest currency gains and weak volumes. December is seasonally a weak quarter led by manufacturing plant shutdowns and from street and channel checks it is clear that the manufacturing shutdowns and furloughs have been extended this quarter. So overall it could be a muted quarter.
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Q: What exactly is the dollar revenue that you are expecting vis-à-vis the guidance?
A: If I had to look at the Infosys’ full year guidance of 5 percent for a full year basis, what we are modelling for the quarter is around 3 percent, but that is predominantly by a Lodestone contribution as well. Lodestone should add around 2-2.5 months of revenue for the current quarter. So it would be a modest 0.5-1 percent sequential growth, including the acquisition it could be roughly around 2.5-3 percent.
Q: Are you expecting the company to scale down their FY13 dollar revenue guidance of 5 percent and if they do that, how much of it has already been priced into the stock?
A: The general consensus on the street is achieving 3-3.6 percent. If I look at the first half number for Infosys and the full year guidance, Infosys was suppose to achieve 3.6-3.8 percent kind of growth in the back half of the year. Given Q3, a seasonally weak quarter and Q4, where you will have the annual IT budget cycle, growth would have been a very strong number to achieve. So, the consensus, as well as our view is that Infosys would likely reduce its guidance modestly.
Now the key remains that how much will it scale down the organic guidance if there is a substantial portion from the 5 percent, then it could have a rub-off effect on the entire industry given that majority of the IT companies have been saying that the manufacturing plant shut downs have been elongated this time.
Q: So Rs 160 per share is what you are expecting as earnings per share (EPS) guidance. What is the current price factored in and if it were lower than there would be severe reverses, again a 5 percent move in the stock?
A: If the dollar guidance number reduction is more by another 2 percent then you could have a reaction similar to what we had seen in the earlier quarters.
Q: Is USD 2.97 the number that the street is expecting?
A: Yes, if the current guidance is around 5 percent dollar growth for the revenue, if the revenue guidance and the EPS is USD 2.97 then the reduction in the guidance is more by 2 percent. So if it goes down to 2-2.5 percent for the full year or 3 percent, then you can have a significant reaction to the stock price. The majority is around Rs 160 and the consensus is at that number. The rupee had depreciated 2 percent inter-quarter, a majority of that has already factored in, in the price.
Q: Within the entire IT space, do you have any picks that you would recommend a buy on this juncture?
A: We have been quite positive on one stock, which is Tech Mahindra. We have been positive for a long period of time, around Rs 600-700 levels. We believe Tech Mahindra’s core growth has been sluggish due to telecom focus. A revival in Satyam is likely to play into Tech Mahindra’s hand and that’s why we are quite positive. Also from a valuation perspective, the stock is trading at around 9 times one year forward, which is very reasonable given that the merged entity will be around USD 2.6-2.8 billion and would fill the gap between HCL Tech and a host of USD 1 billion in the IT space.