Infy Q2 disappoints, stock to settle at Rs 2200-2300: IIFL

India's leading software services exporter, Infosys reported a 24% year-on-year growth in net profit in the second quarter of FY13. The Bangalore based company just about met expectations but, disappointed with a deeper cut in earnings per share guidance for the full year.

Aniruddha Mehta, Research Analyst at IIFL is disappointed with the result and told CNBC-TV18 that although, Infosys' volumes have been good, its pricing has not been good over the last few quarters. At the moment, he sees the stock settling at levels of Rs 2200-2300. Here is the edited transcript of the interview on CNBC-TV18. Q: What did you take away from the number, was it disappointing for you?
A: Yes the numbers have been disappointing and it has rightly reflected in the stock price, especially the pricing that has been falling consistently over the last three quarters. The volumes though have been good, the pricing has not been good.
The client metrics has also moved in a negative manner, greater than USD 100 million and USD 300 million and clients have shown correction. Overall, we did not like the results Q: Where do you see the stock settling now because it is already down 7-8% today?
A: We feel that the stock would probably settle down at levels of Rs 2200-2300 going forward at valuations around 13.5x to 14x one year forward. Q: Just elaborate on that big client issue that you spoke about USD 100 million and USD 300 million, what kind of details did you see there which seem to have disappointed you?
A: The number of clients greater than USD 300 million have fallen as well as greater than USD 100 million have fallen. There seems to be a client churn that we are seeing in the top client at Infosys. Q: Could you understand why the EBIT margins have shrunk so sharply between quarters?
A: There have been some increase in employee costs as well as some increase in SG&A expenses but, we need some clarity from the management as well on what kind of salary hikes have been giving. Whether it is generally a promotion or bonus or is there some amount of partial hikes given to the employees has to be clarified.
_PAGEBREAK_ Q: Were you disappointed with the guidance in constant currency and also in dollar terms and would you have reason to scale down your estimates for both FY13 and FY14?
A: Clearly the dollar quote that we have seen in this quarter even makes the asking rate for the next two quarters pretty high. Again that guidance was largely in line. I don't think the Lodestone acquisition has been included, so largely the guidance has been in line. But, we think the asking rate going forward for the next two quarters is pretty high and we do not think it would be achievable at the rate that Infosys is going. Q: In terms of pricing do you think the pain is receding because this quarter's fall is not as bad as the previous quarters or do you still remain concerned about it?
A: I think we still remain concerned about the pricing. There has been a consistent fall in offshore pricing, especially in the last three quarters and the premium pricing Infosys is getting is impacted by the heightened competition in the market. Especially on the traditional services we feel there could be continued pressure which could impact the operating margin of the company. We have projected a fall in operating margin over the next two years of around 200-300 basis points. Q: In terms of pricing do you think the pain is receding because this quarter's fall is not as bad as the previous quarters or do you still remain concerned about it?
A: I think we still remain concerned about the pricing. There has been a consistent fall in offshore pricing, especially in the last three quarters and the premium pricing Infosys is getting is impacted by the heightened competition in the market.
Especially on the traditional services, we feel there could be continued pressure which could impact the operating margin of the company. We have projected a fall in operating margin over the next two years of around 200-300 basis points. Q: Once wage hikes kick in do you expect more pressure on margins during the second half of the year?
A: The street has factored in the wage hikes and will definitely lead to pressure on the margins. But, I think it has been included in our estimates going forward for FY13. Q: How is the street reading the reallocation of the CFO to focus on BPO, Finacle, etc and how has it gone down with the street?
A: This news has been a surprise for us. We would also like to understand the dynamics behind this role reassignment but, right now we would clearly look forward to the comments from the management on this perspective.
_PAGEBREAK_ Q: What is your best guess on why they had to cut their dollar EPS guidance for the year?
A: I think overall, the rupee EPS has been rebased for the currency movements that have happened during the quarter. I think there could be some amount of basis impact that has been flowing down to the EPS estimates. Considering that they have reduced their constant currency guidance from 6% to 5.7% for the full year. Q: What was your estimate for FY14 rupee EPS for the full year for Infosys and would you have needed to change it in any way after these numbers?
A: Our estimate for FY14 was around Rs 170-172 for the full year and definitely there would be a need to readjust these estimates for both FY13 and FY14 and also include some amount of appreciation in the rupee. We may see a about a single digit fall in these EPS numbers going forward. Q: So you are at the lower end of estimates in any case, because some analysts have estimates of Rs 180 for FY14, you are at Rs 172? You think you would still have to scale it lower?
A: We may do it after our conversation with the management. We will probably look into the numbers. But considering that the full year numbers for FY13, the dollar revenues seems difficult to be achieved, we may reduce the estimates for the two years going forward.