Not perturbed by Infosys warning, still bullish: IDFC Sec

India’s second largest IT company, Infosys , in a concall on Monday had warned investors of weaker margins in the ongoing third quarter of the current financial year due to lower spending by the company’s top clients on account of the festive season. However, the company retained its earlier FY16 guidance of 10-12 percent in constant currency terms.Shashi Bhusan, IT Analyst, IDFC Securities is not too perturbed by the above warning because they had already factored in lower margins for Infosys in H2 than H1 due to fewer working days and costs remaining constant.H1 was blockbuster for Infosys and it would be difficult to repeat the same performance in H2, says Bhusan.The house continues to remain positive on the stock and expects a 13 percent growth in FY17, which is inline with the management commentary of achieving industry average growth rate. Giving a multiple of 19 times for FY17, they have a price target of Rs 1370 on the stock and expect 20-25 percent returns.Tech Mahindra, TCS and Wipro are his other picks from the sector. On Tech Mahindra he has a price target of Rs 680, where he expects improvement in earnings and the second half performance would be better than first half.Below is the transcript of Shashi Bhusan’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18. Reema: Is all the bad news priced into Infosys at a price of Rs 1,000 and after the kind of correction it has seen and secondly on the margin front, have you tweaked your estimates? Your margin estimate for FY16 after what the management had to say in the conference call, how margins in the second half of the year will be lower than the first half of the year? A: If you look at the commentary which came during the conference call of Q2 results, most of the companies were a little cautious on this quarter which is seasonally weak because of the higher number of furloughs and shutdowns and there are few more verticals that got added to that furloughs and shutdowns which was banking and financial services. So, that was the commentary given in the month of October by most of the companies. Now, if I look at the commentary coming from Infosys, in some of the recent webcasts, they reiterated the same thing. Now, they have not changed the commentary, they are still saying that we will achieve 10-12 percent growth in the constant currency terms and H2 is going to be a little weaker compared to H1. But, you have to take a note of the fact that H1 was a blockbuster for them. They did 5 percent plus compounded quarterly growth rate (CQGR) in the first two quarters. It will be very difficult to repeat that kind of performance in a seasonally weak quarter and that too when some of the new verticals are joining shut downs and furloughs. We were not factoring in any acceleration or sustenance of momentum in the second half. Reema: What about margins, did that come as a surprise, their outlook? A: We were factoring in slightly lower margins in the second half and that is what tends to be because you have lower number of working days and costs still remain intact for most of the companies. So, we were factoring in marginally lower margin for second half. It might be 10-20 basis point here or there in fact because of the cross currency because euro depreciated by nearly 4-5 percent. But beyond that, I do not see that there is any accentuated or accelerated impact which would be happening in Q3 and the commentary is very much similar. I do not see any change in commentary from the management from what they said in October. The market might have got a little spooked with some of the analysts on the street, might be factoring in a little higher margin in the second half compared to the first half. But, we were slightly lower in the second half. So, we have not tweaked our estimate based on the commentary which was given by the management. Sonia: So, from here on, what do you see as the trajectory for Infosys? The stock at Rs 1,020, how high is the risk reward now and with a 12 month horizon in mind, what your target in mind? A: We continue to retain our positive stance on the company. What we feel if I look at the first half their deal closure is somewhere around USD 800 million plus on an average which is all-time high. We are factoring in 13 percent growth for the company in FY17 which is very much in line with what the management has stated that they would be able to achieve industry average growth rate in FY17. We have given a multiple of 19 on FY17 and arrived at a price target of Rs 1,370 and we expect a good 20-25 percent to be made from here in Infosys. Reema: Would you also recommend a buy on other IT companies, Tata Consultancy Services (TCS), Wipro and HCL because they too, have corrected in the last few days? A: In our conviction list, we have Infosys and Tech Mahindra in Tier-I, so we continue to retain the preference order followed by TCS and Wipro. So, our pecking order is Infosys, Tech Mahindra, TCS and Wipro and we have a Rs 680 target price for Tech Mahindra. What we feel is that Tech Mahindra perhaps would be one of the few companies where H2 is going to be slightly better than H1 and obviously, their margin profile has nearly bottomed out in the first quarter and some of the initiatives which the management has undertaken either on the automation front or on increasing the utilisation would boost the margin in second half as well. So, they will see improvement in the earnings momentum compared to the other companies which may see muted growth in the bottom level.