Infy misses expectations again: How does the future look?

Moneycontrol Bureau

Technology companies have to rough it out in a market that has been traditionally scoring on the quarterly numbers of Infosys, TCS etc. This time round, Infosys reported a set of pretty unexciting numbers and has predicted that the coming quarters too will be as unexciting.

Although the company missed expectations, it posted a 15.4% rise in profit in the first quarter (April to June) of fiscal year 2012. It's PAT stood at Rs 1,720 crore and revenues at Rs 7,485 crore.

Infosys says it has done better than what it had guided for the April-June quarter. But the sharp fall in the stock shows that the market was expecting much more. Having got used to the company's practice of under-promising and over-delivering, analysts and investors are more focused on the margin of outperformance, rather than the absolute numbers. Speaking to CNBC-TV18, Moshe Katri managing director of Cowen & Co said, "The weakest link in their numbers was from telecom in European sub sectors; it was down 7% sequentially."

What does the guidance say?

The numbers should not have come as a big surprise to the market. In fact, the weakness in the share price ahead of the results seemed to suggest that. But analysts were expecting the tech bellwether to increase its full-year earnings per share guidance. While the company did raise it by Rs 2, it was too low to get the market excited.

Infosys has stuck to its conservative full-year guidance, and said that growth was likely to be even across quarters. "For the year, we thought it would be better to leave guidance unchanged at this point," the core team members told CNBC-TV18 in an exclusive interview.

Katri was surprised to see Infosys repeating its earlier guidance. He said, "The major question here is whether guidance remains the same specifically because of the slow ramp up we are seeing from a host of their top ten customers. Or, is this a function of increasing uncertainty related to client spending intentions given what we are seeing globally here?"

Shaky outlook?

Maintaining an optimistic outlook, the management said that it has achieved upper end of the guidance. However, the company is cautious too that margins in the current fiscal are likely to fall 2.5% compared to previous guidance of 3%. The management reasoned that wage increases have led to margin declines in this quarter.

"We continue to focus on high-quality growth balancing both revenue growth and margins," said V Balakrishnan, chief financial officer.

Strong clienteles

Infosys, which counts on Goldman Sachs, BT Group and BP among its main clients, said it added 26 clients during the quarter. The company also won three large and transformational deals each in the first quarter and signed five platform deals, the impact of which will be seen in the long term with utilisation at 73-74%.

During the first quarter of FY12, offsite volumes increased by 6.8% while onsite volumes were up by 2.7%. The currency impact on margins is at 0.4%, the management said.

Noting that the deal pipeline 'strong', the management added that its discretionary spend is not ramping up.

Other businesses

In the first quarter of FY12, the company's pricing was up 1.2% in reported currency. And a delighted management said that the business confidence is quite high and budgets are intact.

Infosys is planning to increase its presence in consulting and system integration. "We are seeking to have more balanced revenue mix," the management noted.

According to the company, its business operation space has seen realignment of 55,000 people but mix of offshore-onsite has been similar to last year.

Talking about other businesses, the management said that growth in platform, product space will be gradual. Infosys is also planning to explore inorganic growth within platform and product space. Its banking, capital markets grew over 5% in the quarter.

Still stocking it?

Owing to the disappointment, rating agency CLSA has retained its 'underperform' stance on Infosys and sees a downside risk to street FY12 EPS numbers. Along with this, it has also retained its underweight outlook on the IT industry.

"Infosys results were well short of street expectations," the agency said, adding that the company needed a solid quarter to revive investor confidence, which hasn't happened.

However, experts believe the stock won't see a massive downtrend. "The disappointment was on the margin side with declining EBITDA. The topline too, has turned out quite okay. So there is nothing great, but there is nothing to be very disappointed about either. It is not something which will make people change their views dramatically on the market or on the technology sector," Sanjeev Prasad, executive director and co-head of Kotak Institutional Equities, said.

In the coming months, the stock would be lackluster and would trade in Rs 2,800 to Rs 3,000 range, according to him.

KK Mital, head of portfolio management at Globe Capital feels, "There is no downside risk as far as the business is concerned" and said investors should acquire the stock.

Hitesh Shah, director of IDFC Securities too doesn't see any significant changes in the street estimate for Infosys for the full year. "At about Rs 2,900, the stock should not react significantly positively or negatively from here," he added.

According to Nilesh Shah, managing director and chief executive officer of Envision Capital, "It is unlikely that Infosys stock price movement is going to be significantly different than the broader markets. In terms of the medium-term trajectory of the stock, it should find good support between Rs 2,600-2,800. That is the level it has found support over the last several months that would translate 20 times the 130 EPS guidance of the company, maybe 20 times the 140 EPS expectations of the street."

Sandip Agarwal of Antique Stock Broking too remains positive. "Our EPS estimate and price target remain intact," he said. Other operating metrics look good to him. "The attrition rate was low, utilisation had improved and there are no operational challenges," he added.

"Infosys has been losing the habit of outperforming on expectations," said Tejas Doshi at Sushil Finance. The "last two quarters, there were expectations of outperformance but they were not able to deliver. What you can conclude is that things are just as they were in the second half of last year. There is no major improvement."

Shah believes that there needs to be a very clear trigger for the stock to actually move higher up. "I think that the second quarter they need a very strong beat on Q2 numbers, only then you will see the stock price starting to move up little more significantly. We currently have a target of about Rs 2,900 on the stock. We are still in the process of reworking our numbers for FY12 and FY13."

The reshuffle jig

Infosys, in April, announced the retirement of its chairman NR Narayana Murthy, who would step down in August, with chief executive S Gopalakrishnan becoming the co-chairman. KV Kamath, an independent director of Infosys and the non-executive chairman of ICICI Bank, will take over as non-executive chairman. The board also said SD Shibulal, a founder of the company and currently its chief operating officer, would become the new chief executive.

"Reorganisation is almost behind us. We will now take advantage of the opportunity and strength in the market place," the management said.

(With inputs from Reuters)