Productivity may improve for Infy; see uptick in stock:Pros

Infosys on Friday reported stellar fourth quarter numbers with operating profit and profit beating Street’s expectations. The company’s profit grew 3.8 percent to Rs 3,597 crore quarter-on-quarter and revenues rose 4 percent at Rs 16,550 crore. The earnings before interest and tax (EBIT) came in at 25.5 percent at Rs 4,220 crore. The company has also pegged its FY17 revenue guidance at 11.8-13.8 percent in dollar terms.Margins have improved largely due to rupee depreciation, says Karan Taurani of Dolat Capital, adding that FY16 guidance of 11-13 percent is already priced in the stock. Prakash Diwan of prakashdiwan.in, agreeing with Taurani, says margin improvement of about 60 basis points (bps) in a choppy currency quarter is positive for the company. Improved EBIT margin is good even if the guidance for next year is not dramatic, he adds.However, Ravi Menon of Elara says that considering the rupee depreciation, margins came in below expectations. He has a price target of Rs 1,390 for the stock. Diwan recommends buying the stock on dips with expectations of some upmove in future. However, Trip Chowdhry of Global Equities Research, says that the market share win and margins have boosted the FY17 guidance. But, the durability of growth remains in question. He expects the stock to rise in the near-term, but says it could do a u-turn by the year-end. Recession in the IT sector will set in another two to three quarters, which will impact the company, he adds. Menon expects productivity to improve in the coming quarters, but adds that pricing will continue to stay under stress.  Below is the verbatim transcript of Prakash Diwan, Karan Taurani, Ravi Menon, Rahul Jain and Trip Chowdhry with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Reema: Your initial reaction, top line slightly lower, margins a beat? Taurani: The top line estimates in revenue is basically in line with our estimates. We had estimated about Rs 2,438 and it has come in at Rs 2,446 so it is in line with our estimates. Even the earnings estimate is in line with whatever the results have reported. Latha: The margins over 25 percent does that take your breath away at all?Taurani: We were expecting a 40 basis points improvement quarter-on-quarter (QoQ) in terms of margins but they have come up with a 60 basis points improvement that would be largely led by the rupee depreciation which about 2.3 percent QoQ. It would also be impacted by the utilisation. So, nothing like a huge positive or a negative surprise. I mean everything is in line with expectations from the revenue margins to the earnings.Latha: Your first thoughts, does it look like it is at 25.5 I thought the margins are looking like a beat?Diwan: Yes, because if you see expectations of 24.85 or whereabouts the lower band would have been about 24.5, so for some of those people it is almost like a 100 basis points higher than expected. Specially, in this quarter to come up with superior margin profile is commendable. So, I think linked with that it is definitely something that gets a thumbs up.Latha: Now what would you watch out for in terms of guidance and other details?Taurani: Obviously look at the guidance so we also had estimated about 11-13 percent guidance for FY17, tad above NASSCOM estimates. So, if they give about 11-13 percent it is already priced in the stock. Anything above that would be taken as a mild positive. Reema: Just purely based on these numbers how do you expect this stock to react?Taurani: The guidance is not yet out, so I will not be able to comment on that but just purely based on these numbers it will be an non–event kind of a thing. You could see a 2-3 percent kind of upside in the stock nothing beyond that.Latha: Do you expect assuming that the guidance is going to be 11 to 13 percent but the margins have surprised as you said for some people probably 1 percentage point for some people probably 60 basis points higher and for people like Karan Taurani probably 20 basis points higher but nevertheless higher for everybody. What does the stock do?Diwan: This whole thing on the stock finding resistance at its highs is no more going to be there. So, if there is going to be an acceptance that yes it deserves to be at those Rs 1,249 and upwards so you will see that traction happen a little bit of residual buying will also happen. Importantly FY17 earnings per share (EPS) trajectory and projections will be much more benign and much more liberal given this whole thing. You have already started clocking a higher base even with not too much of a revenue growth. We are attributing just at 2.3 percent foreign currency differential but mind you the quarter has been extremely choppy in terms of foreign exchange (forex) and it could have been much more severe the damage could have been much more severe. So, from that angle again the dollar revenue growth also is not at all something you cannot laughable at all.Latha: What is your first comment on Infosys numbers the fourth quarter as well as the guidance?Chowdhry: In line quarter, strong guidance, market share wins is the reason for its strong guidance. Durability of Infosys is questionable because the world will go into recession probably two quarters from now and Infosys will not be immune to that. Latha: What is the kind of valuation you are working with for the company and what is your rating on the company itself? Are you recommending hold, are you recommending that the price might rise in rupee terms?Chowdhry: If you are a long-term holder in the stock this stock will take a u turn by December. It will go up in short-term and in 12 months it will be where it is today. So, we a equal rating on the stock. If you think about, why there is as strength in the guidance? It is because Infosys is wining market share against companies which had IT services in their portfolio and they are spinning it off for example Dell computers spinning off Perot Systems. If you are Perot Systems customers you are not going to stick with Perot Systems. The same thing with Xerox they are on they are spinning off their IT services division. The same thing with HP there is just one off Mphasis and for all these companies IT services is a hobby and not a business. However, if you look at all the four-five Indian IT services companies it is their core business to provide IT services. So, if you are customer of these companies which are in the process of divesting IT services and you are that customer you are probably going to go with either one of these four-five big customers. So, that is a durable strength for almost every IT services company including Infosys. The headwind spread there will get is two quarters, three quarters down the road and that is because every research we are conducting we think the world goes into recession in next two to three quarters from now. None of the Indian companies will be immune to that so the stock will go up. You can buy on Monday, but remember probably the play its one quarter- two quarter so you need to get out before the recession hits the IT services companies.Latha: What is your take on the revenue guidance as well as the actual revenue growth itself? Jain: From all perspective, we are finding it to be a good result. Given the kind of new normal we are seeing for the industry, I think the guidance itself is impressive on the upper end and there are always chances of upping those numbers as the year progresses. We are seeing that they are ending the year at a good quarterly number which set up good base for them to stay forward. If they say that this growth would be more front-ended, then we will always have a possibility of further uptick on this number as the year progresses. Latha: You want to add to any of the numbers that Reema read out as well attrition? Jain: I think one interesting thing is the pricing has been the one factor which has been impacting the overall numbers for Infosys with a lot of reported basis productivity keep on going down. I think that is one number where we need some more input to come from the management given their aspiration of much better per employee productivity to happen and then that number would probably answer some of the net employee addition kind of a data because that would mean the growth going forward would be far more non-linear in nature where you would see revenue growth well ahead of the employee addition. This year you can see that the employee addition is roughly around 10 percent and there is a revenue growth ahead of it. So, that should be a trend going forward but that needs to take up some pace given the aspiration of USD 80,000 per employee kind of productivity which Infosys is guiding for. Latha: What are your thoughts on how the stock might do on Monday and thereafter your expectations on the stock? Jain: Given the kind of market we have right now, I think there should be a good positive reaction. We may see Infosys touching close to Rs 1,250 kind of a thing on a Monday trade itself and Rs 1,300-1,325 in a very short span of time.Reema: We don’t have the guidance yet so you will have to give us your take with the topline figure 1.6 percent and margins at 25.5 percent. Menon: Guidance figure just came in. FY17 guidance at 11.5 percent to 13.5 percent in constant currency is marginally below what I thought. I was thinking of a 12-14 percent. However, this is still pretty good; very close to what we were expecting it to be. Margins are slightly below what I thought this quarter. Given the rupee depreciation, I had expected a slightly higher margin level but I think investments are still happening at Infosys.Latha: The attrition lower at 17.3 percent but net additions also lower at 661, gross additions also lower by 50 percent quarter-on-quarter (QoQ) to 9,000. Menon: If you look at it, the lateral hiring has still been pretty strong. I think they have hired 5,200 laterals. So, it is just fresher hiring; fresher hiring is weak because if you make offers over a year, most of it will be absorbed. So, first quarter I think we would see strong hiring again from campus hires coming into the system. So, no need to worry about that. I think that attrition being low is a good sign. As I pointed out, we also have a guidance and lateral hiring is still pretty strong so I would not worry about this at all.