Infosys may not outperform again, guidance cut likely: IIFL

Below is the verbatim transcript of the interview:

Sonia: The estimate is that Q3 will be impacted by seasonal weakness and our own poll suggests that the dollar revenue growth will be just about 1 percent this time around. What are your own expectations from the earnings?

A: I am also estimating somewhere around that. As you have clearly highlighted this is a quarter where there will be seasonal headwinds primarily because of the furloughs. This time around we will have an additional impact because of the cross currency headwinds. For companies, it impacts anywhere between 1.5 percent and 2 percent. For Infosys it is likely lesser because of their higher USD exposure. So net-net including everything, I think the constant currency growth for Infosys will be about 2 percent and my estimate for the reported revenue growth is half a percent.

There is one thing that we have to remember that Infosys this year, the first half has been much below that of first half of last year. Last year first half they were growing anywhere between 3.5 percent and 4 percent every quarter. So this year, we had a very weak Q1. Even Q2 growth was lower than what it was at the same time last year. But surprisingly because of their guidance, one is estimating their Q3 to be much better than Q3 of last year. Last year Q3 was 1.2 percent; it wasn’t a good quarter for Infosys. So there is definitely going to be a bit of caution, a bit of a jitter because of what they have done last year and how the estimates are for better growth than last year.

Latha: I guess therefore, the important thing to watch will be guidance. What will you watch out for, are you quite clearly expecting a cut in guidance, is that factored in?

A: Guidance cut also part of it is fundamental, part of it is technical because of this cross currency headwinds. Since September if you have seen, currencies have been depreciating against the US dollar. The way it will impact is 1.5 percent of that impact has already happened in this quarter but there is going to be some impact that is going to happen in the next quarter also. So if we assume that the currencies don’t change from the current levels then you have 70-80 bps impact anyway already built in to the next quarter’s numbers. Because of this depreciation of currencies against the US dollar itself, Infosys should cut its revenue guidance by about 1 percent. If they don’t do that, that means that they are upgrading their guidance and that said we have only one quarter left to go. So in addition to change in the overall guidance, I think they will also narrow the guidance band something like what we have seen happening last year. If you remember last year, they started with a guidance of 6-10 percent, 4 percentage point band and they have ended the year with 11.5-12 percent only 50 bps gap in the band. So my estimate is that they will cut the guidance to slightly below 7 percent, 6.3-6.8 percent.

Sonia: The Infosys stock is never perturbed by weak earnings. In fact if you go by history, the worst the bad news, the more the stock falls, the bigger is the rebound 10 days later. So what is your expectation as far as the stock itself is concerned? If we do see a dip post earnings, would you recommend buying?

A: What you have said is partly true but we have also seen major stock movements on the day of the results but what is interesting is this year is not very important for Infosys unless the decline in revenues is something which is a big negative surprise. There shouldn’t be much of anything to read into it. Most of Infosys investment arguments are based around whether Dr Sikka will be able to turn around the company or not, that is clearly a long-term argument. I think that the stock is trading slightly above its fair value. So as of now, this stock is trading at 16.5 to 17 times FY16 earnings, somewhere around 15-16 times, I would be looking to buy.

Latha: You didn’t tell me whether that lower guidance is factored in?

A: No, I don’t think the lower guidance is factored in because street estimates are that they will probably revise it to closer to the lower end of the guidance and not necessarily lower the guidance. I think they might lower the guidance.

Sonia: Give us one word on what your expectations are from the others as well?

A: In general, this is a weak quarter. So I don’t think any company will be able to grow more than 3 percent, constant currency organic growth rates. So in general, I am expecting a 2-3 percent growth for the largecap in terms of constant currency and that will translate into anywhere between 0 percent and 1 percent in terms of reported growth. There is nothing to look for in the margins broadly it should be flat, companies like HCL Technologies where there are wage hikes will have lower margins. So except for HCL Technologies, where I see a 100 bps margin fall for other companies the margins should be broadly flat.

Latha: Would Infosys continue its outperformance or end its outperformance with the earnings season? In the last few months, it has been a clear outperformer?

A: My view is that most of the outperformance, most of the valuation upsides and everything is already factored in. so the outperformance I don’t think will recur and in fact if you look at this year except Tech Mahindra, none of the IT company has outperformed the Sensex or the Nifty.