SENSEX NIFTY
Apr 12, 2013, 11.29 AM IST | Source: CNBC-TV18

Infy now a struggler in decent running sector: Moshe Katri

India's second largest software services provider , Infosys announced its fourth quarter results on Friday. Companies Q4 net profit rose 3 percent year-on-year and 1 percent quarter-on-quarter to Rs 2,394 crore, partly helped by higher other income and lower income tax expenses.

India's second largest software services provider  Infosys announced its fourth quarter results on Friday. It reported lower than expected revenue numbers, but marginal rise in net profits helped by higher other income and lower income tax expenses.

The company guided for a full year revenue growth of 6-10 percent, which is much lower than what the industry body NASSCOM has forecast.

Moshe Katri of Cowen & Co was surprised on this. The numbers posted by Infosys in last quarter were decent and Katri was expecting some sort of acceleration in those numbers.

He told CNBC-TV18 that 6-10 percent top-line growth guidance for FY14 seems pretty benign and weak. "Things are actually going well for the sector, but Infosys on a relative basis is still struggling", he said.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: Are you disappointed and surprised at the numbers and the weak guidance that has been put out?

A: We are a bit surprised. I would say that because of the numbers that we saw last quarter was a pretty decent sequential growth. It was aided by Lodestone acquisition. We did see last quarter that volume growth was pretty benign, but we did expect to see some sort of acceleration in that number.

I don’t know if we saw it or not, but 6-10 percent top-line growth guidance for FY14 seems pretty benign and weak. On top of that we did not get the EPS guidance that we were hoping to get, which means that there is some sort of a delta in terms of where margins can go during FY14.

I would say that what we saw in terms of stock action ahead of the release, we have probably seen some short covering ahead of that. That was probably in line with the overall trend that we saw in tech or we saw a lot of the short positions being covered given the fact that the market is really rallying and Infosys benefitted from that.

On top of that do not forget that during last quarter one of the reason why the stock was up so much post-earnings was that half of the American Depository Receipts (ADR) flow was shorted. At this point we have not seen that. We have seen some short covering and that explains that the stock probably is going to be under pressure tomorrow morning or even tonight in India.

Q: Would you expect to see large scale selling even from the slightly longer term investors on Infosys?

A: We have had massive conversation with investors throughout the quarter. Lot of the guys we spoke to were shorting the stock or trying to cover their short positions. We are not familiar with lot of people that were actually long on the stock.

So, I think what one may see is some fresh short positions in the stock, given the fact that the guidance looks so poor that 6-10 percent number. The organic number will probably see even worse. Obviously if one steps back and looks at the numbers, last quarter what helped the numbers were a massive pick up in products, a massive pick up in India and obviously at this point we have not seen it this quarter.

At this point based on that 6-10 percent number we are not going to see that hopeful sequential growth that everybody was looking for. Also ahead of the quarter we have seen that pretty interesting de-growth expectation between the US sell side that was relatively conservative and India based sell side that was very aggressive in front of the numbers.

Probably the number growth can get a bit closer in terms of where the actual numbers are going to be for Infosys for FY14. So one may see some accelerated sell into the quarter, past the quarter, but I would say that in general things are going on pretty decently for the sector in general.

We had Accenture coming up with very strong numbers for their consulting business. So, things are actually going well for the sector. Infosys on a relative basis is still struggling. The business is stabilizing, but at this point it is more about how long it will take them until they generate industry like or peer like growth rate.

Q: With such a big difference between the industry guidance and its own guidance in a relative world do you think it stands to get punished more relative to its peers?

A: Fundamentally, it makes a lot of sense. When we downgraded stock a quarter ago we looked at our survey. The survey said that on a relative basis customers are planning to spend less money with Infosys versus some of their peers. It is not a function of where they can be in long run and they can really catch up.

So, on a relative basis that means that Infosys will be an underperformer relatively to a Cognizant or a Tata Consultancy Services (TCS). However, again in the long run this company can really get its act together, but it is going to take some time.

When it starts trading at 18 times earnings, which looks pretty expensive especially when you can own a Cognizant. Then that will likely grow 20 percent this year top-line versus an Infosys that may grow 10 percent top-line for FY14.

READ MORE ON  Infosys, Q4 net profit
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