See margins improving for Infosys; prefer TCS: Nomura India

Ashwin Mehta, IT analyst at Nomura India expects dollar revenue growth for Infosys to be around 2.6% quarter on quarter (Q-o-Q) and does not expect any change in their FY15 dollar revenue guidance of 7-9%.However, he expects margins to improve by 40 basis points (Q-o-Q).According to him TCS will continue to trade at a premium over Infosys, and so he prefers TCS. His other picks in the IT space are HCL Technologies, Cognizant. Although Vishal Sikka might not disappoint in this comments tomorrow, he does not expect him to announce any material change in the strategy. The company’s strategy as stated by NRN Narayana Murthy of delivery, cost efficiency and sales effectiveness would continue, and Sikka would aim to focus on setting the company’s core business right, believes Mehta.

Also read: See no change in Infosys FY15 $ guidance of 7-9%: Ambit Cap

Below is the transcript of Ashwin Mehta’s interview with CNBC-TV18's Anuj Singhal and Ekta Batra.Anuj: This would be the first result under Mr Sikka, so the market would be keenly watching out for what his vision statement is but from the last quarter’s earnings perspective what would be two or three most important bits that you would be watching out for and your own expectations?A: In terms of our expectations we are looking at close to 2.6 percent sequential growth, a marginal improvement in margins around 40 bps and them keeping the guidance intact but more qualitatively we would be looking at what they say in terms of deal flow, what they say in terms of banking and financial services and retail demand because those are two segments where some of the players have indicated some concerns and thirdly on what Dr Sikka says in terms of their strategy going forward.So, we would be looking at Infosys accelerating investments on the sales side to kind of cut the gap with others. We would be looking at what they are planning to do to leverage Dr Sikka’s capabilities on the newer technology or the innovation side of things. So those are the things which we would be watching for. In terms of capital allocation our view is that it is possibly something that they will quantify more towards the end of the year rather than now. They will rather want to decide on what their spends are or investments would be before committing on the capital allocation.Ekta: Do you think that the market would be disappointed if in case the numbers meet expectations but the strategy which is outlined by Vishal Sikka doesn’t?A: I don’t personally think there will be a material change in terms of the strategy that Mr Narayan Murthy had indicated. So they will continue to focus on the three tenets that he talked about which is delivery efficiency, gross efficiency and sales effectiveness. What the market would be looking at would be, one; what they are going to do in terms of attracting more people towards Infosys, what they are going to do in terms of tackling the attrition issues at Infosys and what they are going to do in terms of leveraging Infosys trends in consulting and SI on the newer technology sides like digital.So, we would expect that articulation to happen and possibly our view is that the market might not be disappointed with what Dr Sikka talks about but it will take time in terms of the revenue revival to happen is what our view is. So that is something that is still work in progress in our view.Anuj: This year also we have seen a massive underperformance for Infosys compared to Tata Consultancy Services (TCS) even though since Mr Sikka’s takeover that has corrected a bit but from here on do you think Infosys would continue to underperform TCS or would it play some kind of catch up?A: Our view still is that TCS should outperform Infosys. So, HCL, Cognizant, TCS are our preferred picks in IT and that view stems from the fact that TCS does not have portfolio issues; it does not have sales issues. It is a running engine from an addressable market perspective; their addressable market is possibly the largest among the Indian IT players. So, from that perspective TCS will continue to trade at a premium to what Infy trades at and will continue to outperform in terms of growth. So, we still continue to prefer TCS over Infosys.Ekta: Do you think that there could possibly be a complete shift away from the core bread and butter business of Infosys to something which might be more transformational and transitional for Infosys where they could possibly only reap the benefits two to three years down the line?A: No, it will be a two-way thing in terms of trying to set right the core where there has been some lost connect with clients and where Infosys has underperformed and that is one area where the industry has growth over the past few years. So, almost 45 percent of incremental growth has been coming in from infrastructure management services (IMS), business process outsourcing (BPO) kind of segments for the industry. So, you cannot ignore those segments. While you cannot ignore those segments and in those segments Infosys will possibly chase some of the other companies like TCS or HCL on the IMS side.On the other side, you are seeing trends shift in terms of who controls the budgets within the organisations or the client organisations and that is an area where Dr Sikka has his trends. So, that is an area where Infy would possibly look to differentiate and try to close the gap on the core ADM, IMS, BPO kind of cost efficiency areas.Anuj: Do you expect any kind of change in guidance or that is something you won’t expect?A: No, we don’t think there will be any change in terms of guidance. We still think they will guide for 7 to 9 percent.