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Last Updated : Apr 13, 2016 12:38 PM IST | Source: CNBC-TV18

Buy Infosys on dips; news on deal pipeline key: IDFC Sec

Shashi Bhusan, IT Analyst, IDFC Securities, expects the company to issue a revenue guidance of 11-13 percent for FY17.


Shashi Bhusan, IT Analyst, IDFC Securities, recommends buying Infosys on dips because there are material upsides to be made in the stock.

He has a target price of Rs 1380 on the stock.

The IT bellwether will be reporting its fourth quarter earnings on April 15. IDFC Securities expects the growth trajectory for the company to improve year-on-year (YoY) as cross-currency headwinds abate.

Bhusan said he would be keenly watching out for Infosys' deal pipeline outlook in the management commentary. If it is strong then all other negatives will be taken care of, he says.

He expects the company to issue a revenue guidance of 11-13 percent for FY17. Operating margins is likely to stay in the 24-26 percent range for the new fiscal year, he says. However, he expects Q1 to be impacted by wage hikes and visa costs.

Commenting on the Wipro buyback, he says it could be a more tax-efficient way of returning cash to its shareholders. He also expects other companies to follow suit.

“Wipro has been a leader in terms of setting a trend for the industry,” says Bhusan.

Wipro Board will consider buyback of shres on April 20 when it will be announcing its Q4 results.

Below is the verbatim transcript of Shashi Bhusan's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: What are you working with in terms of expectations from Infosys?

A: For Q4 in constant currency term for revenue, we are expecting 2.5 percent quarter-on-quarter (Q-o-Q) growth. In US dollar terms because of the cross currency headwinds we are expecting 2.1 percent Q-o-Q growth. In terms of operating margin, we are expecting 25 bps decline because of the project ramp up that will be witnessed in Q4.

Sonia: What about the guidance for the full year both revenue and margins, what is the expectation?

A: In constant currency term, we are expecting 11-13 percent revenue guidance for FY17 and in terms of operating margin, it is likely to stay in the range of 24-26 percent. I don’t think there is going to be any change in the operating margin guidance from the management. Yes, for Q1 there will be impact because of a wage hike and Visa cost. So our sense is that wage hike is likely to be in 5-8 percent or maybe 6-9 percent kind of a stuff. That will have an operating margin impact of 150-180 bps.

Year-on-year (Y-o-Y) Visa cost has increased, almost doubled. So that will have an impact of 50-70 bps on operating margins. Overall, management possibly could guide for 200-250 bps of margin erosion. However, the company is sitting on margin levers in terms of utilisation onsite mix, some sub-contracting cost, even INR every now and then are supportive. So our sense is the company would able to do away with some of the headwinds and the impact should not be more than 120-150 range for Q1.

Latha: What are you pricing in by way of an EPS for FY16 and more importantly for FY17?

A: FY17 we are working with 66.5 in terms of EPS growth we have for this year. For this year it is almost done, it is nearly irrelevant where they stand. It is only Q4 and one quarter of number. So the stock is still trading cheap. We believe that in terms of deal closure that could be one thing, which should look at for the company because if you remember last quarter it was in the range of 350-360 and they said that USD 600 million deal got pushed to the next quarter. So anything above USD 1 billion deal closure should be construed as positive for the company in Q4.

Sonia: So in terms of the stock price, how are you positioned? It has been three good quarters for the company and the stock has reflected that, 25 percent higher since the month of November, if this is a quarter in line with expectations, do you expect to see any profit taking, would you recommend that or do you still continue to see more upsides in Infosys over the next one year?

A: One thing is near-term sentiment because of quarterly fluctuation and you have to agree with the fact that right now the fluctuation in terms of economic outlook is way too high and so is the quarterly performance. We continue to like the structural recovery in the company. We feel that the company is on the right footing and is all set to deliver one of the strongest growth in the industry among the tier-I in FY17.

So even though there is in-line performance or stock may fall, there is slight disappointment, we would recommend buying into the declines and we still feel there are material upside from the current level that is to be made in terms of a stock return. We are valuing this company at 20 times FY17 and our target price is Rs 1,380.

Latha: What will be the one thing you will watch out for from the management commentary?

A: The deal closure and deal pipeline. Still all the expectations are hinged on the growth in the industry. If the growth picks up rest every operating metrics can be taken care of. So, if the deal closure is healthy and the management commentary around deal pipeline and around dealwin rate are strong then rest all will be taken care of with quarterly fluctuation here and there, but we are not too much worried about that.

Sonia: This morning there is also some news on Wipro that the board will consider a buyback on April 20, what do you think the maximum buyback could be considering that the company has Rs 25,000 crore of cash on its books and as a shareholder, how do you approach it?

A: Difficult to hazard a guess. Our sense is that this is more tax efficient way of returning cash to the shareholders. As the growth rate for the industry matures and stays in this high single digit or low teen to mid-teen kind of level, this would be more of a phenomenon followed by most of the tier-I companies to return cash to the shareholder.

So this would be more of a regular phenomenon rather than just one-year or one quarter phenomenon for the company and Wipro has always been a leader in terms of setting the trend for the industry. I am very sure that this would be followed by some other companies as well going forward.

First Published on Apr 13, 2016 11:16 am
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