With all four Big IT companies having declared fourth-quarter earnings (and nearly each disappointing the street), Infosys was the only one that saw a decline in constant-currency growth.
But investors should focus on the positive guidance laid out by the company, which sounds “achievable”, according to Kawaljeet Saluja, executive director and head of research, Kotak Institutional Equities.
During its earnings call, the Vishal Sikka-led company said it expects to grow revenues by 10-12 percent in FY16 and will likely be back to industry-leading growth in FY17.
In an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, Saluja said that a number of factors may make this happen. “Four quarters back, you had concerns on margins, management churn, attrition and revenue growth. The first three have been taken care of. And several lead indicators are showing revenue growth may enter a sustainable acceleration in growth.”
While the stock may underperform in the near term due to the fourth quarter miss, the Kotak analyst said he believed the valuation difference between Infosys and TCS should continue to converge (former being 20 percent cheaper on PE basis).
Below is the transcript of the interview.
Sonia: I was going through your note and I see that you have cut the target price on Infosys and the EPS estimates as well. I just wanted a more qualitative view first up. We have heard the management of Infosys say that there have been delays in tamp-up and a couple of deals that they lost as well. Do you think this is a structural slow down that Infosys is going through and would you think there could be a de-rating of the stock going ahead?
A: Well as far as this quarter is concerned as you rightly said there was a broad base miss in revenues but it was more concentrated towards telecom and energies and utilities verticals. Now you can basically take this miss as something which is going to be a broad representation for FY16 or perhaps you can focus on qualitative aspects which show improvement. Now over here let me just highlight it, over the last 12 months what are the improvements which Infosys has seen. Four quarters back Infosys had four major challenges, margins, management churn, attrition and revenue growth.
Now as far as attrition rates are concerned, that is down, management is stable-margins is something which has held steady despite investments made by the company in various assets of business. Finally when it comes to revenue growth, even in revenue growth there are certain lead indicators that are positive so if you look at the revenue growth of the company from top five accounts, that is pretty good.
The movement of clients across various buckets, that has held on also pretty we ll. So, I would say that qualitatively the changes made by the new CEO seems to be pointing towards a nice turnaround or sustainable acceleration in growth. So, I would look at the March quarter as a disappointment but more as an aberration rather than try and look at it as something structural in nature.
Latha: So would you say you are basically happy with the kind of earnings guidance that they have given? You think it is believable and are your earnings estimates based on that?
A: They have given a constant currency revenue growth guidance and on constant currency revenue growth guidance what does it assume in terms of a Compounded Quarterly Growth Rate (CQGR) in FY16 is approximately 2.8 percent to get to 10 percent constant currency revenue growth. Now if the company achieved a 2.4 percent constant currency revenue growth in FY15 so it is just a 0.4 percent acceleration which is believable, which is not a difficult thing to believe given the way some of the metrics which I just highlighted earlier have been proved over the last 12 months. So I would say that 10-12 percent is achievable more towards 10 percent rather than 12 percent.
Sonia: If you compare Infosys with the other peers, do you reckon that there could be a large degree of under-performance that Infosys sees in the next one year purely because of what it has delivered in the past compared to TCS’s 15 percent dollar revenue growth in FY15, Infosys is just five and a half percent and even in the quarter gone by Infosys is the only company that has seen a negative constant currency growth. Having said all that do you think that there could be big degree of under-performance versus the other companies?
A: There could be some degree of under-performance in the near term. At the end of the day in turnaround stories people do expect a lot and Infosys has disappointed to some extent in the March quarter results but as I said, if you are taking a 12 month view then broadly the company is nicely set for growth acceleration. In any case I don’t think the street was expecting a convergence in growth between Infosys and TCS in FY15 in any case.
Latha: No that it wasn’t but clearly there was an out-performance of the stock vis-à-vis TCS, you think that ends?
A: Of course that will end till the time a company delivers up to street expectations again.
Latha: Now what would be your relative valuations of Infosys and TCS?
A: The relative valuation of Infosys is trading at roughly around 15 times the FY17 earnings and 18 times of FY16 earnings which is in a discount to TCS of around 20 odd percent. So the question is related to the pecking order between Infosys and TCS, it will be Infosys followed by TCS.
Latha: So you expect that therefore the valuations will start converging?
A: Yes as growth rates improve but it is more of a 12 month call really.
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