Infosys retains a sell despite Q3 performance: Ambit

Below is the edited transcript of Ankur Rudra interview on CNBC-TV 18 

Q: What did you make of Shibulal’s statements, is it adding to your confidence or not so much?

A: I think the two main positives are the fact that they are confident of improving recovery in terms of the demand scenario. That is positive for the sector.The second positive is on the margins. If they give comfort that the margins can stay at this level I think it is a bit of a positive because that was one of the areas where we and several sections of the street was concerned how sustainable this is.

Having said that if you drill down the numbers for this quarter to see where the margin recovery and the margin surprise has come from, you will see two areas. One has come from an offshore shift so sustainability of that offshore shift whether it can happen over the course of FY15 or not in a growth year is a bit of a question mark right now.

Secondly, there has been a decline in sales and marketing spending. Again if it is a growth year and you are looking at aggressively targeting every growth opportunity like he made in his remarks one would question whether sales and marketing spending can remain subdued to that extent.

Having said that, one still wants to hear about what they feel about attrition numbers. They continue to trickle up as you can see the headline attrition numbers are high on an LTM basis -- clearly an area of questioning on over the course of confidence call that will begin in an hour’s time because if you are entering into a period of stronger growth then the demand - the supply side scenario may not remain as easy as it was over the last one and a half to two years and hence ability to keep increasing utilisation levels and keep delivering double digit growth with a net head count reduction that we saw this quarter will be a bit of a challenge for them.

Q: Since the numbers were good this time around and the management believes that because the business environment is improving, they can capitalise on that going ahead as well, do you think the stock deserves to be at a higher price than this and would you increase your EPS estimates now for Infosys?

A: Let me start with the second part. I think EPS estimates will go up for us and for across the street. The margin performance is better than what we expected. But having said that, a lot of these stock price performances in the last one and a half months seem to have anticipated them performing relatively well. Expectation was more on the revenue than the margins. So as you can see their revenue numbers are a bit shy of what the consensus expectations were although the margins were stronger. So we think an upgrade in terms of share price is unwarranted right now because a lot of the positives were already maintained.

The question marks around attrition will stay. Although management has tried to allay fears around the impact of the senior management departures, one can only be able to assess that in the coming quarters whether there is a trickle down avalanching effect of these senior management departures on the mid-level management team because there is quite a relatively large reorganisation for any form or the size.

A very senior layer of executive council has been disbanded, a new organization structure is being considered. How that will play out, I think it is very early for even management themselves to comment on with a serious degree of visibility.

Q: I was just reading the previous statement that came with the results and comparing it what Shibulal said a few minutes ago. The first statement had more spring in its step, I would think it said the year ahead looks exciting for IT services, we believe the global economic environment improved, our clients are gaining confidence to invest in strategic initiatives. Now he goes on to say the budgets will be stable. So do you think from the previous statement to now, we have not got more confidence so there is no more reason to buy the stock that we got after the numbers?

A: You are right. If anything the statements they made right now seemed a bit less optimistic than the written statements. That is something to focus on. So I guess management may try to play this up more on during the conference call in an hours time but yes, there is a bit of a difference in tone there.

Q: How would you expect the stock price to move? At what level are you a buyer and at what level are you a seller if at all?

A: Our target price going into the results was around Rs 2,900. So we are clearly a seller even with an EPS upgrade, we will remain seller. The main concern for us is given FY15 we expect it to be a growth year, we don’t see Infosys being a growth leader there.

We see HCL Technologies, Tata Consultancy Services (TCS) and Cognizant continue to be growth leaders.The main worries are in terms of what will drive growth, if you are still reducing head count which is still seeing senior leaders leave, the ability of participating in that growth and maintaining the valuations is a bit of a challenge for us. Hence we think at this price, given most of the positives are now priced in, we would remain sellers and we would expect profit booking to start.