Bull vs Bear: Should you buy Infosys after 9% correction?

Mehraboon Irani had a bearing stance, saying that the lowered guidance is still optimistic but slow revenue growth is a matter of concern for the company.

The reduced guidance is a big disappointment and that the stock is still not attractive despite a 10 percent correction.He feels that the stock may find its feet around Rs 1,000 per share.Below is the verbatim transcript of Mehraboon Irani and Rajesh Kothari’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18. Anuj: Even 10 percent lower you are a bear on the stock. Explain the call? Irani: If you ask me first of all from the guidance angle it has been a big disappointment. One of the most highly respected company and everybody goes wrong and the management comes and cuts it revenue guidance. That itself is a big disappointment. Now, if you look at the revenue guidance also there is lack of visibility on revenue growth. This we saw in Tata Consultancy Services (TCS) yesterday, we are seeing it in Infosys today. Is it is a company specific problem and industry problem it is too early to comment on that. Coming to the slower growth in large deals and not much of an increase in discretionary spending is also worrying. And if you ask me this guidance which the management has given they have clearly ignored Brexit impact as of now and if you ask me this guidance seems to be on the higher side. As far as the stock goes after this correction of 10 percent, you rightly asked me, am I still a bear. The fact is a 10 percent fall, is it reason enough to buy into a stock in which I know the upside as of now is capped. So, from that angle certainly not interested. Around 1,000-1,020 all the negatives will possibly get factored in. People may look into the stock all over again but I personally am not interested because I feel the guidance given by the management now is also on the aggressive side. Sonia: Do you think that the sector as a whole could start underperforming the market and in that sense even if you get an attractive level in Infosys maybe the upside maybe capped for the year? A: Certainly yes. As I said earlier this could be an industry problem and not Infosys problem, point number one. Point number two is exactly what happen to pharma about a year ago when people were possibly not able to discount the regulatory problems and that has what lead to the sharp erosion and share prices as far as pharma stocks goes. Industry wise if there is a problem we could have a sharp underperformance coming from the IT sector. So, as of now we had been underweight on the IT pack and we continue to remain underweight as of now. Anuj: You have been bullish on the stock, is it because it is now looking attractive after the fall or have you seen any silver lining in the numbers or the commentary? Kothari: Basically as I mentioned earlier we are not overall very positive on the sector. In fact we are negative on information technology (IT) as such on the sector. But within the sector we like one or two companies and one of the company which we like is Infosys. If you go by our investment philosophy which is the 3 M approach, the first M stands for the market size. The size of opportunity is huge and probably the one company which can capitalise on the size of opportunity in India then it can only be Infosys in the software sector, that is number one. Number two is market share, the second M, and Infosys being the leader is definitely rightly positioned, if you look at the Infosys entire strategy to drive on the new revenue streams that is doing extremely well. If you look at the top 10 clients and top 25 clients growth then they are ramping up very well. If you look at the total TCV then that is also doing overall very well. The third M stands for margin of safety. We are buying Infosys at probably close to 15 times next year. So, unlike healthcare where also we are overall negative on the sector the leading player in the sector which is one of the best player in the sector you are getting it 15 times and rightly so because it is expected to grow at about 14-15 percent earnings growth. But where you can see surprise then this 15p can become 20p and that is basically the entire investment thesis, the bet is. This year is going to be very critical for Vishal Sikka because he has given the next three years guidance when he joined the firm. And if you go as per this guidance then the target is USD 17 billion revenue by FY20. FY16 the revenue was USD 9.5 billion. So, USD 9.5 to 17 billion of course that is an aspirational thing even if we assume USD 9.5 to 15 billion it means in FY18 and FY19 you need to add close to USD 2.5 billion compared to USD 1 billion what you are adding in FY17 that means the current year Infosys needs to deliver in terms of other acquisition, cash deployment to the best of the segment, higher and higher capital allocation to the new revenue streams. That is what we are looking for. I am not looking for quarter to quarter number because in fact Mr Vishal Sikka was already mentioned that you will see volatility in the quarter. Everybody was writing very bullish on Infosys just one month back and now everybody is just writing off the name, that is not fair. What is important is to look at how the Infosys do in terms of the building blocks in next 12 months so that he can achieve his aspirational goal of USD 15-17 billion kind of a revenue in next three year. And if they miss in doing that in the next 12-15 months then surely probably they may not be able to then meet the targets.