May raise Infosys' earnings estimate now: IIFL

IT giant Infosys Q1FY14 results were better than street estimates. Aniruddha Mehta, Research Analyst, IIFL told CNBC-TV18 the broking firm may raise the company's earnings estimate. "We would up our earnings estimates around 2-4 percent. But it is subject to changes after a conversation with the management," he added.

For FY14 Mehta is expecting the company's margin to correct around 200 bps.  He sees around 1-1.2 percent of compounded quarterly growth rate (CQGR) for Infosys over the next three quarters. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Would you need to up your earnings per share (EPS) estimate significantly on the back of what you have heard today? A: The numbers were better than estimates. Against the expectation of flat revenue growth and the growth was strong at 2.7 percent, the margins were flat against the expectation of 110 bps fall. So, overall we would up our estimates for earnings which should be around 2-4 percent. Obviously it is subject to changes after a conversation with the management. Q: You are confident that you are going to see a consistent performance through all of this year for Infosys because we went through this in Q3 where performance was much more than estimates and Q4 was a shocker? A: If you see the internals of the result, strong growth has come from consulting, which contributes around 6-7 percent of the incremental revenues. Consulting being discretionary and lumpy in nature, I feel consistent performance as compared to this current quarter may not be possible. It is also visible in the implied compounded quarterly growth rate (CQGR), which is negative 0.5 to 1.5. So, it is not as strong as compared to this quarter. We would expect around 1-1.2 percent of CQGR over the next three quarters for the company. Q: Does it have any rub-off on what you are doing with estimates on some of the other IT companies, would you look to up it a bit because Infosys as well has managed to have a strong quarter, you think it is going to be a very standalone performance for each company? A: Not really. Strong growth has come from Lodestone. Lodestone has grown 30 percent quarter-on-quarter (Q-o-Q) in this particular quarter. Also that implies that cannot be extrapolated to other companies. So, I would not increase the estimates for the other companies in our coverage. Q: What kind of price will you work with now with Infosys which has already moved to about Rs 2,800-2,850 in very quick time? A: As I said there would be an increase around couple of percentage points in our earnings estimates. I would believe the price target would come around Rs 2,700-2,650. So, again I wouldn’t turn bullish on the stock. We would remain market performer considering there are headwinds that are not yet at rest. There are no big bang announcements as yet, we have to watch for management commentary as well as the immigration bill, which is still an overhang on the sector. Q: What are you penciling in terms of margin performance though especially given the fact that the management themselves have guided to slippage there? A: For FY14 we are expecting correction of around 200 bps over FY13. This includes the positive impact on the rupee. The impact of the wage hikes, which will come in the next quarter. Q: At Rs 2,830 you would ask your clients to take profits on the stock now? A: I would advice them to probably take profits on the stock and maybe enter at lower levels.