Infosys capacity utilisation to go up in few qtrs: Envision

He expects the Infosys stock to be in the consolidation zone as the recent highs are likely to act as significant resistance. He feels the Street will be focusing on dollar revenue growth, which is lagging behind its peers.

Below is the verbatim transcript of Nilesh Shah's interview on CNBC-TV18

Q1: What is your take on the Infosys Q3 numbers?

A: By and large it is in line with expectations. Revenue growth was expected to be tepid so it is virtually a flattish revenue growth in dollar terms. The margin expansion could be because of course those visa costs they had last quarter and it is quite possible that Infosys was one of the very few companies among the tier I which had capacity utilization of less than 80 percent. So we have got to watch that number, if it crossed 80 percent which could have led to margin expansion.

Q: Your reaction to the fact that utilization has inched up 1 percent point higher.

A: I think that is a very big positive and utilization has potential to keep moving higher and higher over the next few quarters as Infosys tries and bags a lot of transformational deals and is able to put its bench to work. So I think that is a number which will keep inching up which could lead to margin expansion for a few more quarters and that is going to be a huge positive for Infosys as a company.

Q: So immediately what is your call on the stock, would you go ahead and say that it is going to head higher another 7-10 percent?

A: I think that is going to be unlikely. I would be surprised because I believe that the street will be wanting to focus on the dollar revenue growth. I think that is an area where Infosys is really lagging behind its peers while the peers have been able to report mid single digit dollar growth in revenues, Infosys has not yet been able to do anything significant on that score. I still believe that the turnaround in a way is still work in progress and the street will want to hear what the management has to say. So it is quite possible that after this big move the stock could be in a consolidation zone, the recent highs itself will actually act as a significant resistance.

Q: What would make you buy Infosys at this point in time, are these results enough?

A: Two things, one is if the management steps out and says that the worst is over and the initiatives that they have taken over the last quarters are likely to bear fruit now going forward which will give a very strong indication to the street that FY15 could be a potentially strong year for Infosys. So that is one. Two is essentially what rest of the pack say because clearly what has really happened over the years is that tier I players like HCL Technologies, Tata Consultancy Services (TCS) have clearly outperformed Infosys because of better growth.

Q: Are the management statements indicating that this is a company that is seeing more deal wins?

A: Clearly you can see the tilt in what the management is saying. All along for the last several quarters I think Infosys has consistently been saying that they are cautiously optimistic about future prospects. The word cautiously is now really out. So I think it is probably giving you or opening the first window of optimism in terms of their prospects. So that is a key positive which is coming from the management commentary.

Q: Would this be enough for you to buy the stock because this is what you were really waiting for?

A: Yes this is an important catalyst, this is an important trigger but as we say that the devil is in the details so we will really have to get into detail and get more granular in terms of what really makes the management so positive and is the worst in terms of the churn at the top level over? If Infosys comes ahead and says that by and large the organizational restructuring is through and there aren’t going to be any significant tweaking to the top management structure and the rejij, I think that itself will be a huge consolation to the street.

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Q: What is happening with this market, the first week of 2014 has been extremely tricky and now it has moved to the lower end of the range that many were talking about. Do you fear that the uptrend has gotten arrested?

A: It looks like because the uptrend was more triggered by global liquidity and expectations that economy could look a lot better in the second half but I don't think there are any kind of indications as yet which suggests that the macros are likely to improve significantly or that the inflation has come off significantly or interest rates are about to fall. There are no such indications, neither are there any indications that the GDP growth rate is going to be significantly above 5 percent or go towards 6 percent. I think these are some of the expectations which probably had got built around 2-3 months back and you are clearly seeing now the market getting a little worried or little cautious about that.

A little bit also on the political side is that if a few weeks back there was fair bit of confidence that probably the probability of a decisive mandate was there but that seems to have come down, the probability levels have come down. So there are some concerns or apprehensions even coming in from that angle and clearly on the banking side I believe that is one sector which is likely to continue to underperform significantly and that is where also the concerns could be coming in from.

Q: Many analysts were making the point that the operational performance of Infosys is now bottoming out and perhaps because of the cost control initiatives etc. they could improve in terms of the margins going ahead. Do you think that could be one of the reasons why Infosys could outperform the other peers in the sector?

A: Absolutely. There is a very strong case for outperformance by Infosys, because really what the market looks at is essentially the delta of growth and clearly here you are probably seeing a big change in the delta of Infosys after a long time. The fact that you have margin expansion happening and there is potential for margin to expand even further, because capacity utilisation is still 74-75 percent and probably not yet crossed 80 percent if you were to basically factor in the bench. So I still think there is potential for margin improvement. They are putting to work a lot of the idle capacity which they have putting to work the bench. I think they are getting more aggressive.

If you really look at the management commentary they are talking of seizing growth opportunities. This is essentially a language which Infosys has not used now for quarters and for years. So I think you are clearly seeing renewed aggression out there when they talk about seizing growth opportunities, promising outlook, I think these are very, very strong words which are coming out from the Infosys management which is clearly reflecting the renewed confidence out there. I think this itself could be a significant driver for Infosys to outperform the other Tier 1 names which have outperformed now for years. So I think it is quite possible that Infosys now is likely to step into the outperformance zone for a few more quarters.

Q: They have used statements like seize the opportunity and still not sacrificed on margins. The margins if anything have improved. Would you say therefore that the valuation gap between Infosys and Tata Consultancy Services (TCS) narrows now?

A: I think there is a case, but we have only heard one side of the story, we have yet to see what the others come out and say. For example, this looks good for Infosys on a standalone basis, but the markets are always about relative valuations, so if TCS and HCL Tech come out and give even a more aggressive commentary then maybe the outperformance might get delayed, but otherwise on a standalone basis there is a case for outperformance.

Q: What is the near-term movement in the stock you think? Do you think another 5 percent move is there purely because of the kind of body language you can detect in the statements?

A: I think there is a case. It really depends upon how soon the street prepones the FY14 kind of estimates. If the street decides to prepone and rerate now itself in terms of the numbers for FY15 then my sense is that the upside could even be higher, but in case for any reason that does not happen or if the dollar softens versus the rupee then it is quite possible that that process might get delayed. I would say that between now and April it looks that Infosys is set for a strong upmove.

Q: One niggling worry that most investors have had for this stock in the last 6-7 months is the management churn and whether it will go ahead and impact deal momentum. No one really know that. It is only in due course of time. But for an average investor do you think he should just discard those worries because the fact of the matter is that even though 9-10 executives have left the company the stock has been moving higher and discarded all that bad news?

A: I do not think investors should be unduly worried about these changes. These are part and parcel of every large company. In fact for example, even Bharti Airtel had a lot of organisational changes and nobody really talked about it, whereas Infosys has come out a lot in the open. So I do not think so. I think it is a very well oiled engine out there which is at work. The captain of that engine is pretty much there, he is at work and he seems to be doing an amazing job out there, it has not affected the quarterly performance. If you really look at it this quarter the number is good and again if you look at the management commentary, the management goes ahead and said that the recent organisational changes will actually further strengthen client relationships, so I clearly believe that there is really no reason to worry or be apprehensive about these recent changes.

Q: Infosys has guided on how they see the visibility of business. Any comments?

A: The fact that they have basically upped the guidance a little bit in terms of revenue is coming in by all these business and marketing initiatives that they have done. Even if these 20 deals are not really transformational deals, but they are large deals enough. I think it bodes well.