Expect subdued guidance from Infy: Angel Stock Broking

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Should you still invest in IT stocks? No surprise likely from Infy nos, guidance: Brics iGATE reports revenue of Rs 805.1cr for FY07 Re appreciation to affect iGate's EBITDA margins ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Excerpts from CNBC-TV18's exclusive interview with Harit Shah:

Q: Infosys in first place. What are your forecast for Infosys, what are they expected to announce tomorrow both by way of profit growth for the Q4  as well as guidance and whether you think that the problems raised by iGate about the subprime mortgage market will cast  shadows on the guidance that will come from Infosys?

A: We do expect about 4.5-5% sequential net profit growth tomorrow when the company announces results. But more importantly, the, guidance number will be looked at more closely by the markets. We expect 25-26% growth in rupee term in the topline and probably 22-23% on the bottomline.

Apart from the subprime lending there has been a meltdown in that market, a lot of clients of iGate have actually on bankrupt. Companies like Infosys, TCS typically earn 25-30% of the topline from the banking. Certainly we are sure of the impact but probably this could be one factor that could lead to the management giving out more subdued guidance than they would probably give otherwise.

Another factor of course is the rupee, which has appreciated quite significantly over the last month. They typically take the rupee-dollar closing rate at the end of March at the last trading day of March to convert their revenues to rupees for the guidance purposes. So this time around the rupee-closing rate was something like 43.47 to the dollar whereas last year when they gave their guidance for last year FY07 it was about 44.50. So there is quite a significant fall in the rupee.

Definitely, that could be another factor that may sort of result in a subdued guidance. Maybe another factor could be client's specific issues in the sense that particularly ABN Amro currently is in hte middle of a merger talk with another major banks.

Q: How do you see the guidance being impacted by the ESOP issue and how much of a concern would the low billable days in the 4th quarter will have a impact on the results that will be announced tomorrow and subsequently for the other IT companies?

A: As far as FBT on ESOPs is concerned they are in discussions with the concerned authorities, they are not yet certain as to what could be the exact impact. Though we could have some sort of a dilution in this, because of this tax they may have tried to persuade a lot of their employees to sort of exercise the ESOPs in this quarter itself before the end of March 31. So if that does happen, I believe they have about 12 million ESOPs outstanding before the budget announcement. Therefore if that does happen then we could see some sort of a dilution which could result in the EPS growth being flatter than the net profit growth and as typically does happened when you see an equity dilution.

Q: Specifically with regard to Q4 the less number of billable days you have?

A: That tends to be a seasonable factor of quarterly variations; the same thing was the case in December. But if you would talk about pure volume growth then we don't see any major slowdown in that particular aspect of IT companies. More importantly, the rupee appreciation will be more of a factor that might impact the topline growth of Infosys as well as the other top 3-4 companies in this particular quarter.

Q: Outside the top 3-4 from the midcap IT space who have been quite significant performers in the equity market which should be your top pick for this earnings season from the midcap IT space and what sort of EPS growth would you look for that?

A: Not for this earnings season, if I were to look at one or one and a half years perspective we like companies like 3i Infotech which have been doing a lot of dilution, a lot of equity dilution, a lot of FCCB issues in order to fund their growth plans but on the other hand they have also to their credit manage to sort, all these acquisitions have been accretive to the EPS so no problem on that front.

So we expect this company to do quite well basically they had a lot of acquisitions in the last year so we could expect an EPS growth in FY07 of about 90-100% they will do quite well but the next two years I think 40-50% is not an unreasonable expectation from this company. They are doing good job of trying to differentiate themselves from the largecap company so that is one stock on which we are very positive.

Prithvi Information Solutions is another interesting idea. The stock hasn't moved too much but they have been doing a good job as far as their financials are concerned, they have consistently grown and even sequentially even though they have moved a lot of their work offshore. So that shows that volume growth continues to remain strong along with a margin expansion their bottomline expanded about 85-90% so that is another very cheap kind of stock that we see even after taking into account the recent FCCB dilution or it remains good stock going forward.

Another interesting idea is of course Geometric Software ; that stock went up quite a lot, yesterday it was about 15% or thereabouts. They have acquired an engineering company and overall we remain positive on that company as well.