Ambit Cap may up Infosys EPS estimate on strong rev growth

Infosys, India's second largest software services exporter, surprised the street with better-than-expected results for the third quarter. In an interview to CNBC-TV18, Ankur Rudra, Ambit Capital said that there EPS expectation going into the results for the full year was Rs 163. Now they are likely to up it, given the stronger revenue growth guidance.

Below is the edited transcript of his interview to CNBC-TV18 Q: What are your thoughts from what you gleamed from the management talk as well as the seminal improvement in volume that you are seeing in Infosys, are you getting a sense that it is sustainable, what are you working with now in terms of EPS? A: I think what is interesting about the quarter results is how much of pricing led revenue growth there has been this quarter on an organic basis. Volumes have been relatively muted about close to 2 percent and on an organic basis this is not very strong. I think what has surprised to an extent is the nature of the growth. A lot of growth was in non-US markets. US did not grow beyond 1-1.5 percent. A lot of growth was also non-application development maintenance. The parts of the business that came to the party were European consulting outside of Lodestone. They were Australia, BPO products and very surprisingly India. The question is how much of that is sustainable. Given it is not as linear and predictable as the legacy US and ADM business. We are assuming that our EPS expectation going into the results for the full year was Rs 163. We were at a lower dollar revenue growth rate than what management has indicated. Luckily the numbers have surprised everybody here. So, the lower EPS despite a stronger revenue growth number is somewhat surprising. It possibly indicates management is expecting stronger margin erosion going forward into the next quarter. Also read: Infosys surprises with better-than-expected Q3; guidance up Q: Do you up it from Rs 163? A: We are likely to up it from Rs 163 given the stronger revenue growth guidance. However, the fact that management has not done so, makes us wonder what the reason would be. We will try and address that in the conference call this afternoon. Q: Eight quarters of disappointment and one quarter in terms of a positive result for Infosys. Do you think that they have turned the corner or would you look for a sustainable trend for a couple of quarters and then be a little more positive in terms of Infosys numbers? A: The biggest question on the stock right now is that, is this structural turnaround or possibly a bunching above several pent-up positive drivers. This happened to happen in one quarter or is it a turnaround for the sector from a demand perspective? We do not think demand has turned around so much across the sector. We will not decide right now. We will wait for results, at least for one more quarter. Is this is a structural turnaround as the parts of the business which performed very strongly are not the biggest parts. It is not the US, it is not application, development and maintenance (ADM), it is the rest of the business which historically have been relatively volatile. Q: As yet no re-rating of TCS or the other peers? A: We would expect re-rating of TCS or other peers to be function of two things. One is that does this depict a stronger demand scenario. From the comment this morning, management does not seem to think so. We would conquer from what we have heard so far. The other leg of the re-rating or a de-rating could be whether Infosys would become a strong competitor. Structural nature of the turnaround as opposed to a one of nature is something we could decide to see a de-rating versus a re-rating. Q: You did mention about the dynamics within volume and pricing whereas volumes were subdued and pricing was positive, would you look for those two parameters in terms of a turnaround maybe higher volumes and lower pricing or maybe not that much emphasis on pricing going forward in order to sustain the revenues and margins going forward? A: I think we would like to see volume growth sustained if not accelerate from this point on. Stable pricing with stronger volume growth is always preferable over pricing led growth because pricing led growth is difficult to see how sustainable that can be.