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Apr 13, 2012, 01.30 PM IST
Technology major Infosys disappointed the street by its revenues and EBIT, though profits came in slightly higher than expectations.
Discussing the numbers, Nilesh Shah, MD & CEO, Envision Capital and Dipan Mehta Member BSE and NSE agreed that with the all-round guidance - whether its revenues, profits and rupee terms, dollar terms all in single digit, the market will not take it kindly given that the stock is trading at double digit valuation.
Below is the edited transcript of Shah and Mehta's interview on CNBC-TV18. Also watch the attached video.
Q: We don’t have the FY13 guidance yet but from the little that you have heard, what would you take away before we get to the guidance?
Shah: Of course, these numbers are below expectations. I think they have missed the guidance both in terms of revenues as well as earnings per share. They had guided for an EPS of Rs 42 for the quarter. Based on rough cut calculations, the EPS numbers are also falling short of the guidance. Clearly from that perspective, these numbers are disappointing.
Q: What would you want to see in their Q1 guidance as well? People want to see some kind of steady performance this time around because if they talk about this back-ended growth, people may not take the guidance too seriously.
Mehta: More than the guidance and the expectations for the first quarter, I think the body language of the management is important. Last two-three quarters, they have been talking their stock down; they have been trying to defuse the expectations of the investors.
Whether there is a change in that is what we are looking forward to this time around when they report and they discuss the results with the media. We have always seen Infosys try and deliver more than what the street is expecting; that also appears to be changing. So we need to see their comments in terms of the environment and how they are will get about their targets and how the landscape is changing and Europe being a major factor for them. I think these are the important variables which one needs to really look at more than the actual numbers.
At the end of the day, this is not like a 25% kind of a increase in top line which we were seeing two-three years ago or so. It is more muted in the 12-14% or so, which means that the external environment is playing a far greater role in the operations of the company than ever before. That can easily be gauged and the numbers would become comparable with the rest of the industry. It is more to do with whether some of the leadership issues have got sorted out and it is back on its growth track; how the client addition has moved and how they are going to scale up the number of employees.
Q: When was the last time you saw quarter-on-quarter (QoQ) revenue slip 2-4% in dollar and rupee term?
Shah: Not really, I think this is unprecedented. We have clearly seen slippages across the board in terms of guidance, on a QoQ basis; there are slippages both on dollar and the rupee front. So I think clearly this is all round slippages, which to the best of my memories, is completely unprecedented.
Q: Going into this quarter, there were expectations that not only would it be lukewarm but they had been facing a lot of pressure towards the tail-end of the year. The ramp up would only happen post March, so this could likely be a touch quarter for them in terms of what happens with revenues, do you think this is a shocker?
Mehta: Let us see the full picture. We have some time before the stock starts trading; by then, all the details would be out and then we could take a composite view as to which way the stock would trade.
But I still feel that whatever Infosys has to say that will all get discounted by in one hour of trading. Then, the market will move on and this will be just another story which is over and done with and we will be focusing more on global markets, the RBI policy and so on.
Q: Guidance is tough; 8-10% revenue growth should be hugely disappointing?
Shah: Absolutely, I think this would be completely disappointing; the guidance which has been provided is even significantly lower than even the most bearish estimates or the most conservative estimates so it’s going to be pretty challenging times for the stock.
The other important thing is that all-round guidance whether its revenues, profits and rupee terms, dollar terms is all single digit. This is something which we have not heard from Infosys for a long time. Single digit growth is something, which is not going to be acceptable. The market will not take that kindly given that the stock is trading at double digit valuation. So the big issue there is, of course, slippages, and second, single digit guidance on both revenue and net income front.
Q: Now that you have heard all the numbers would you say that the stock is in for a sharp downward reaction?
Mehta: Yes, at least today, and more importantly, this process of derating of the PE multiple, contraction of the PE multiple that will continue for some more quarters. We have seen that happening through the last 12 months or so where it was further trading at 25 and it is now 16 times and maybe 12-13 times or so or even lower.
Certainly, the disappointing trend over the past couple of quarters seems to continue. The management has a lot to answer for in terms of performance as well as guidance this time around.
Q: Are you a bit more nervous about earnings and the impact for the market?
Shah: This does not bode well for the earning season. If we step back a few months back, technology as a sector was probably one of those very few open-source software (OSS) of growth within corporate India. As a sector, the expectations were that growth would be above 15-20% in an environment where the US is recovering better than expectations. They had certain tailwinds of the currency. In that context, the sector was expected to have a growth of 15-20%.
The non-technology pack, within the market, was expected to probably have those low double digit growth, which is probably in the band of 10-12%. Here we have a situation where technology, where expectations were a lot higher, is talking about single digit growth. So I think this has significant impact for overall earnings growth. I think that has some serious implications for the markets and for the overall growth trajectory.
Q: Are we still game for a pull back to 5500-5600 or is that looking tough from a market perspective?
Shah: That’s of course becoming increasingly tough especially given the kind of guidance, which Infosys has given. So clearly again, it’s something which we can’t look forward to; earnings as being a catalyst to take the market to the 5500-5600.
Therefore, I think RBI’s credit policy and what it proposes in that credit policy becomes extremely important if this market has to kind of pull back to 5500-5600. Clearly of course, the global risk on trade is going to help. There is some kind of a tailwind, which that is going to provide to the markets.
From a local standpoint, what the RBI is going to do in terms of its credit policy and on rate cuts will be important. There are expectations, which have got built up there as well but the street is expecting definitely a rate cut. If the RBI obliges, I think that would only help the pull back but if it doesn’t, then obviously, we are in for serious trouble.
Q: Do Monday and Tuesday also have the potential of breaking the range for the market on the downside? Will it be that big an event from the market’s trading range point of view?
Shah: Clearly, if the rate cut does not happen in the credit policy, then I think the downside risk to the market increases. These levels of 5,150-5,200, which have been an important support area for this market for the last two-three months, will surely get challenged.
The risk of that breaking down will be significant because what this market lacks are two things. One is basically policy action on the domestic side, and two, is basically earnings growth being significantly worse than even the most conservative expectations. I think these are two serious headwinds, which the market will face which would definitely lead to this market breaking down below those key support areas of 5,150-5,200 if the credit policy does not oblige the market.
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