Infosys: Repeating history?

Infosys Ltd. | IT - Software | IT & ITES | BSE: 500209 | NSE: INFY

08 Apr 2011 Evaluate

Even though the company gave a rather muted guidance of 1-2 per cent sequential growth for the fourth quarter, the Street is expecting the company to beat its own forecast as it has done always. The optimism is due to an improvement in the business momentum across business verticals and geographies, indicating increase in IT spends. The management has conveyed to analysts that spendings on consulting and implementation will improve over the next 12 months.

A brokerage firm is modeling Infy’s revenue growth at 4 per cent in the fourth quarter, better than the company’s guidance. This, however, according to analysts, is lower than the 5 per cent revenue estimate for TCS in the same period. However, if Infy gives a USD revenue guidance of 17-19 per cent and rupee earnings per share (EPS) guidance of 14-16 per cent, the stock would be a good buy.

A report by a foreign brokerage house, says that Infosys has been the worst performing large cap IT stock in the last three months. It is now at 10 per cent PE discount to TCS, with similar FY12 earnings before interest, taxes, depreciation and amortisation (Ebitda) growth and higher EPS growth forecast. If FY12 guidance is in line with the market’s expectation and the company outperforms its fourth quarter guidance, then the trend could well reverse for Infosys. The Street expects the company to bridge the PE discount to TCS, given similar Ebitda growth forecast.

Even as the pressure of wage inflation is likely to rear its ugly head again, analysts claim the company expects levers such as employee pyramid, scale benefits, non-linearity and improvement in the margin of subsidiaries to cushion the impact. While some pricing power has returned to the industry, it is not expected be have a big positive impact.