Won't scale down FY13 EPS estimate for Infosys: Antique

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Sandip Agarwal, IT Analyst, Antique Stock Broking in an interview to CNBC-TV gave reading for IT giant Infosys ' Q3 results . He also shared outlook for the peer stocks.

Below is the edited transcript of Agarwal's interview with Udayan Mukehrjee and Sonia Shenoy of CNBC-TV18. Also watch the accompanying video.

Q: What is the key disappointment for the street?

A: The key disappointment is the flat growth for the quarter 4 because if you are given a flat growth guidance for quarter 4 people are building that they have some insight on what kind of budget finalization will happen for FY13.

That sends a sign of pessimism. People are not only seeing a weak guidance for quarter 4, but they are also expecting that FY13 dollar guidance will not be very encouraging. So, that is the major disappointment which has come.

Q: We just heard from the management that early indications of next year's budget are that they could be flat or even slightly lower. Given that context how would you approach the stock from a medium term perspective?

A: In the medium term there could be some pressure, but as the management has said, it will be too early to comment much on the budget because budget gets finalized by end of January or beginning of February. So, even if it remains flat then I don't think there will be much to worry because anyway most of the people on the street are building in a 16-18% kind of volume growth which should not be a problem.

But if it is negative lets say 2-3% then there will be some pain in short term or medium term. We believe that outsourcing will grow if macro remains here and as the management said in Europe the outsourcing is very less. We are firm believer of the fact that in a bad macro environment, cost cutting initiative and pressure grows up which results into higher outsourcing. It can come up with lag of it maybe a quarter or two that is a different thing.

In the medium term there will be some pressure but in long term, the fundamental of the company is well placed. Although in this quarter we didn't see much improvement on the operating matrix. We were expecting a improvement in the utilization level and also sharp fall in attrition which did not come, so that is a little bit of concern.

Q: The stock is trading it Rs 2630 now what kind of a price band do you see it trading in the next few months?

A: Right now people are giving too much weightage on the currency part which is not the right way of valuing it. From the volume growth perspective, right now it looks like volume growth may not come at 18% for FY13 it can be slightly lower than that. But if you reset the currency with current at 51 or 52 in your estimates then obviously EPS numbers will be very high.

Finally, it is a question of how you value the company whether you give it a multiple to its earnings or you reduce the multiples. If you are going to reduce the multiple then price band range could be around Rs 2,800-,3000, but if you maintain the multiple then it can be higher.

Q: Currently how are you positioned on the stock at this point in time? What would your target price be?

A: We have not yet revised our target price. Our last target price was Rs 3,318 but with today's fall and we have to obviously go back to the conference call and get some more details from the management. Based on that we will come back with that revised target price, so it would be difficult to give any target price right now.

Q: Given that they have upped their FY12 EPS to 147, would you scale down either your FY12 or FY13 EPS estimates at all?

A: No, we will not scale down our FY13 EPS estimate because they are already at a lower volume growth assumptions. We are expecting a 15-16% volume growth only in next year, so we are one of the lowest on the street. In the FY13 EPS estimate also, we are at 165-166 which I don't think will have a major hit because that is at 47-47.5 kind of currency, so I don't think there will major cut down on that.

Q: Given the kind of tone that Infosys has set out for the entire sector this quarter, what is your view on the other stocks on both TCS and on Wipro specifically?

A: We believe TCS will be in range of what volume growth Infosys has posted. We are expecting around 3-3.5% kind of volume growth for TCS also. The only limited point which we see is that TCS operating matrix is at optimum levels and for them to improve operating matrix from here will be very difficult.

That is our call since last quarter and that is the only concern. If your operating matrix are not going to improve much then you are taking a call on currency only because rest of the things impact the sector more or less in similar way. Here the volume growth could be percent higher or lower that is it.

Q: Anything in the internals of the numbers that went down as a disappointment either the way North America grew or any of the individual verticals did?

A: No I don't think there is major disappointment on that internal number. The disappointment is only on the utilization front. Company was expecting to exit this year at 80% kind of utilization. We were also expecting the company to exit FY12 at 80%. I don't think that is going to happen now because they are still at around 77%. It is a major disappointment.

A part of the reason for that disappointment is the higher attrition level which should have come down to 14-14.5 but it is not at that level. It is still at 15.4, so it is phenomenally much higher than what we were expecting. Until and unless that number comes down it will not help the margins to improve except for the currency part.