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Apr 12, 2013, 07.51 PM IST | Source: CNBC-TV18

Hopeful of demand recovery in IT sector: Edelweiss

Clarity from the management will be awaited before revising Infosys’ earnings forecast for FY14, says Sandip Agarwal, AVP- research at Edelweiss Financial Services.

Clarity from the management will be awaited before revising Infosys’ earnings forecast for FY14, says Sandip Agarwal, AVP- research at Edelweiss Financial Services.

Talking to CNBC-TV18, he says that 4 percent growth was expected, with the actual figure coming in at 1.4 percent. Margins too have taken a sharp dip. So, in the overall scheme of things, the current quarter numbers are disappointing, and also the guidance at 6-10 percent is a very wide range, which sends negative signals to investors.

Also read: Sensex drops 300 on Infosys shocker; IT shares struggle

Here is the edited transcript of the interview with CNBC-TV18

Q: Have you been able to rework your expectations yet? How are you pitting out FY14 in terms of what you think will be reasonable revenue growth and earnings per share (EPS) expectation from Infosys?

A: We have not reworked our numbers. We will wait for clarity from the management. Yes, the numbers are very disappointing. We were expecting around 4 percent kind of growth. The growth is much lower than that, it is at 1.4 percent. In margins too there has been a sharp dip.

So, on overall scheme of things the current quarter numbers are disappointing although the constant currency growth is at 1.7 percent, and also the guidance at 6-10 percent is a very wide range, which send signs of pessimism in investors’ mind. Having said that, we have not redone our numbers yet and will definitely wait for the management to give more clarity on the call and what is the reason of this wide range.

We are quite hopeful that there is a strong recovery in demand, so it should benefit all the players. But this wide range of guidance puts a question mark on where things are moving. So, we will have to wait and understand why there is a wide range. On the margin front, the decline is largely on the gross margin level and in the limited numbers, which the company has issued.

If you see in the subsidiary information, Loadstone is showing a loss of 3.5 million for the quarter. So, I think the decline on the gross margin level could be quite largely driven by Loadstone.

Q: Loadstone is going to remain with them. How is that an alleviating factor that margin pressures might have come from Loadstone? It is not like next quarter they are going to sell this company?

A: It is not that. They have started integrating this company in the last quarter only. We all know that consultancy is a high billing business but a low margin business primarily due to erratic flow of work. So, the margins will not turnaround immediately and it will remain with the company.

But this kind of expectation was not there that they will report a net loss from Loadstone. So, we have to clarify with the management on whether that was one-off kind or something in that number at least.

Q: Did you have a buy or outperform rating on Infosys before the result?

A: Yes, we had buy rating before the results.

Q: Organic revenue guidance is about 5-8 percent. There is no EPS guidance, which means there is no clarity on margins. Pricing is down for them sequentially and they are saying that they are facing an aggressive pricing environment. What else do you want to hear from the management?

A: Pricing is down 70 bps, and that number should not be seen very closely because there is a quarterly swing in the consultancy and business mix. I would like to highlight again on the margin side if you as a question, efforts on onsite has gone up 80 bps this quarter and we know that onsite is a low margin business.

Therefore, I think 40-50 bps impact could be there because of a change in business mix following a change in execution. So, I do not take it very strongly, but we take the lower revenue growth and lower guidance little negatively. That is for sure, but we will wait and will seek some clarity from the management on that.

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