Analysts see silver lining in Infosys's FY16 rev guidance

During the conference call, the company CEO & MD Vishal Sikka said the traditional IT services business is dying. He sees the industry going through a fundamental and structural transition.

In an interaction to CNBC-TV18, Trip Chowdhry of Global Equities Research, San Francisco, said the IT industry is in a downturn and like every industry, which has its good times and bad times, this too is going through that typical cycle.

“I don’t think there is any reason for investors to be optimistic about the IT sector for at least another 12 months or maybe two years because as in the conference call Vishal (Sikka) mentioned that things need to be changed big time because industry is going through a massive shift and somehow almost every Indian IT services company hasn’t reacted proactively to it. So this is a secular downward trend and we have to live through it,” he said.

According to Sandip Agarwal of Edelweiss Financial Services, the numbers are definitely below estimate. “We were expecting at least flattish-to-half percent kind of growth in dollar terms implying 2.5 percent kind of growth in constant currency but the numbers have come at 2.7 percent kind of decline in dollar terms so it is below our estimate. Even profit after tax (PAT) and margins are also below,” he said.

However, for him the good thing is that company guidance is slightly higher than expectation.

Future outlook

Going forward, Infosys expects FY16 revenue to grow 10-12 percent in constant currency terms and sees rupee revenue growth at 8.4-10.4 percent.

Shah feels a 10-12 percent growth is a reasonably benign outlook to give as far as Infosys in concerned. “This is essentially what the Street wanted. And I think this augurs well for the stock. The key issue is -- will the company meet this guidance? There should not be misses, it is also constant currency. There are couple of variables out there. But if you set that aside, a 10-12 percent revenue growth outlook in constant currency is a good guidance,” he said.

Agarwal said, “We were expecting 7-9 percent in dollar terms and this looks like slightly higher than that may be 7.5 to 9.5 assuming that there will be 250 basis point of impact of cross currency.”

Taming attrition

The company has reported a fall in its attrition rate to 13.4 percent from 21.3 percent on a sequential basis.

Shah feels this shows the company is on a path of recovery. “Clearly the kind of lows that they had witnessed a few quarters back on all fronts, at least that seems to be a thing of the past,” he said.

Agarwal too feels things are looking better for the company as far as the attrition parameter is concerned. “Attrition at 13.4 percent is an important and good number to look at. This company has been suffering from very high attrition from past seven quarters,” he said.

Acquisition spree

Infosys announced that its board has approved acquisition of Kallidus Inc, a software solutions, e-learning and talent consultancy firm, for USD 120 million. The sum includes a deferred component and retention bonus.

According to Shah, this strategically looks to be the most prudent thing to do. “You probably don’t have enough skill sets to fully serve your customers on digital transformation. So, acquisition is probably the way forward. A USD 120 million acquisition is really not very big for Infosys,” he said.

Stock view

The stock plunged over 5 percent post result announcement. However, Shah expects it to be relatively stable. “Post the earnings call, the Street and the analysts will have a better handle in terms of what precisely this growth translates into in terms of earnings growth and what their outlook not just for one year but maybe for the next couple of years,” he said.

However, Chowdhry feels that it is really important to think not in terms of companies or stock. “India is going through a very critical phase and we need to make sure Indian companies are focussed on market share and land grab and they should do away of thinking in terms of profitability,” he said.

According to him, if that doesn’t happen the industry as a whole could see 50-60 percent layoffs, which would be a serious economical headwind to the country as a whole. “They (IT companies) are trying to focus on profitability and quarter to quarter stock movement and that is the reason none of the Indian IT services companies are able to reinvent themselves,” he added.

Written by Kankana Roy Choudhury