Despite steady Q2, analysts red flag Infosys over guidance cut

Below is the transcript of the interview with CNBC-TV18. Latha: What will you do? Your worst fears have come true. What would you do? Shah: This is definitely, not good. It does not offer you any hope because this is now a guidance for the rest of the year which means you have got to deal with this subdued growth or honestly virtually no growth for another two quarters. So, it is still some time away before they can actually come in and say we are getting back into the path of double digit growth. So, they have moved into a single digit growth. Anuj: 52-week low now on the stock. Rs 1,000 was something which a lot of people were looking at that Rs 1,000 would be a good level to watch out for. But, are the FY18 estimates now at risk? Is the street still being charitable in giving the kind of estimates and in that case, some more de-rating? Shah: The big risk with a lowering of the guidance for FY17 is that honestly, I am not too sure whether analysts will even be able to project or forecast FY18 numbers with a fair degree of certainty. So, what really happens with the stock is that it gets into a zone of uncertainty that you really do not know. As I was saying earlier that you still have another two quarters to go before the FY18 guidance comes in from the company. And six months is a long time in the market place. And that is the big challenge. It is not about whether or not in FY18 the growth will 11 percent or 8 percent or whatever it is, somewhere analysts are going to find it very challenging to forecast FY18 with a fair degree of certainty and that is really going to be the big challenge for the stock. Latha: The numbers have come in line or even better than expected. The profit coming in at Rs 3,606 crore and the dollar revenue as well, beating, but guidance lowered to 8-9 percent in constant currency terms and dollar revenue lowered to 7.5-8.5 percent. Your thoughts? Katri: Not a huge surprise. We have been talking about some of the secular issues that the industry is facing, so maybe you have some cyclical issues as well, but you guys are talking about the ability to predict, the ability to guide and not miss and this is such a difficult environment for this sector because of some of the challenges that it has to go through. I do not think this is slam dunk, I do not think this is something that goes away in a quarter or two and that is the biggest issue here. So, you have had a deceleration in topline growth, some multiple names in the industry every year for the past 3-4 years. Everybody is trying to deal with it. Some companies are dealing a bit directly, proactively, some of them are not. So, this is really the issue. You can blame it on Banking, Financial services and Insurance (BFSI), you can blame it on retail, this is deeper than that. The good news is that they are addressing it. I just think it is going to take time for some of the companies to get there. And the model that everybody is going to have to replicate is a model that started doing this four years ago. Latha: At what point will you buy the stock? Katri: Let me add two more things that I think are relevant. The multiples are sitting at trough levels right now. So, we are probably 200-300 basis points below where we were in 2008. So, we have a pretty decent low. So that is number one. Number two, if you look at the actual numbers, obviously, they have had a huge push from India. India was up in constant currency about 28 percent and then the products were up sequentially 5 percent. So, these are two lumpy areas and that kind of drove, potentially, the upside that we are talking about, the sequential growth. What do we do with the stock right now? At this point, you are almost getting to a phase where the investor base is moving from momentum/growth to value and if you are a value investor and you have time to waste, you are in decent trade. If you are a momentum or growth investor, you are sitting kind of in a runway zone between now until early January, until we get a better feel on Budgets, what sort of Budgets we are going to see next year, are Budgets going to be ready on time, are we going to see delays, etc. Sonia: This quarter’s numbers are good, better than expected, but they have scaled down their revenue guidance for the full-year. What would you view be on how to approach the stock now? Taurani: This is moving to a scenario where the gap between Infosys versus Tata Consultancy Services (TCS) now reducing basically. So, where you saw Infosys going 2-3 percent higher than TCS in terms of revenue growth, that is getting converged. So, in terms of TCS, we probably expect about 7.5-8 percent kind of constant currency growth and now Infosys has given a guidance of 8-9 percent. So, that gap of 2-3 percent which was there is clearly converging and that will clearly have an impact in terms of multiples. So, if you see Infosys has been trading at 15 percent kind of a premium valuation versus TCS given the higher revenue growth. Now with the revenue growth gap clearly converging, you will see some kind of downside for Infosys.