Harit Shah, senior research analyst at Nirmal Bang Institutional Equities, tells CNBC-TV18 that Rs 165-166 is a more reasonable EPS target for Infosys in FY13. "Given the fact that they have taken an average of 50.88 as rupee rate for the year, they will definitely have to do that," he explained, adding that the lack of any salary hikes over the year will further help their margins.
According to him, the sharp fall in the stock today is due to the company's guidance for Q1, which is 0-1% revenue growth. "Coming on a very low base of the fourth quarter, this is something that is a fairly disconcerting factor for the market," he said.
Nirmal Bang currently doesn't have a positive rating on any of the IT stocks at this point. "But from a relative perspective, probably an HCL Tech or a Wipro would do little better than Infosys," said Shah.
Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.
Q: Are you going with the kind of EPS that Infosys management has guided, which is sizably below what the market was expecting, or do you think they would still deliver north of Rs 160?
A: Definitely they have to do that because if they are not able to achieve that in spite of a rupee tailwind, I think you will see a further derating of the stock. So in any case, I think that probably Rs 165 to Rs 166 would be slightly more reasonable target for FY13 EPS, especially given the fact that they have taken an average of 50.88 as rupee rate for the year. So that gives around 5-6% straight away you get a rupee tailwind on account of that factor.
Plus the fact that there is not likely to be any major salary hikes in the year will be a positive factor for the margin profile as well. So probably Rs 160-161 is slightly on the lower side.
I think the bigger picture is the fact that your guidance is so subdued especially for the first quarter, where you have guided just for 0-1% sequential dollar revenue growth and that too coming on a very low base of the fourth quarter. So this is something that is a fairly disconcerting factor that is a key negative factor that the market is looking at and that is reflected in the stock price movement today.
Q: What is your view with regards to what's going on in the industry and whether this is actually company specific problem?
A: I would like to look at this in two ways. As far as the Q4 numbers are concerned, I think it will be a fair point to say that this is not just a company specific issue. You will see that happening even in the other companies’ results when they are announcing their numbers later in the month. So you are going to see a weak fourth quarter because of client delays and these factors are likely to lead to fairly slow revenue growth.
The question here is if the kind of fairly subdued outlook for FY13 is going to be seen in the other IT firms. At this point, it's very difficult to make a call but we would probably go with the latter, that it’s more a company specific issue as far as FY13 is concerned. So I don't think a Wipro or an HCL Tech will make the same bearish commentary as what Infosys is making regards FY13.
Q: At Rs 165-166 EPS, what valuations will you give the company?
A: Rs 165-166 was just an approximate figure, we are still reworking our numbers at this point in time for the stock as far as FY13 is concerned. As far as valuations are concerned, one of the key reasons that historically the stock has commanded a premium multiple to the market is because of the predictability of its earnings. It's quite clear that for the last several quarters now that predictability has gone away now, it's becoming increasingly more difficult and volatile to predict their earnings.
So given this factor, it will be fair to say that there should be a bit of a derating as far as the multiple that you should award the stock is concerned. So at this point we will probably go may be with a maximum of a 15 times multiple to Infosys.
Q: What exactly would be your pecking order within the frontline IT space post Infosys? Also, do you think Infosys actually has lost that poster boy reputation that it used to have?
A: From an absolute returns perspective, at this point we won't have any buy ratings on any of the IT stocks. We had initially a buy rating on HCL Tech, but that stock has also run up by about 20% since that, so at this point we don’t really have any positive ratings on any of the IT stocks.
May be from a relative perspective, probably an HCL Tech or a Wipro would do little better than Infosys but from an absolute rating perspective we don’t have any buys right now.
Q: Anything we missed out from the management meet that you want to highlight at all?
A: No they have been cautious for a while now for the last several quarters, they have repeatedly maintained that cautious stance and this time around it seems to have become even more cautious. There are talks that they had the highest amount of client addition in this particular quarter and apparently even from our talks with other IT firms you can clearly gauge that probably clients have more or less finalized their budgets by the end of March.
Having said that, that should therefore reflect in your guidance for the first quarter. Unfortunately Infosys hasn’t quite done that. Their guidance of 0-1% is a pretty subdued guidance and that is something which is one of the few factors that is concerning the markets at this stage.