Infosys is expected to announce its second quarter result on October 12. Most experts feel that the recent fall in the rupee will help boost Q2 earnings of the Indian IT companies like Infosys. Ashwin Mehta from Nomura India too feels that Infosys is likely to benefit most from the rupee’s depreciation..........
Infosys is expected to announce its second quarter result on October 12. Most experts feel that the recent fall in the rupee will help boost Q2 earnings of the Indian IT companies like Infosys. Ashwin Mehta from Nomura India too feels that Infosys is likely to benefit most from the rupee’s depreciation.
“We expect Infosys to cut its FY12 revenue guidance to 16-18% from 18-20%. However, the company will be able to clock 18% outperformance in the second quarter earnings per share (EPS),” added Mehta.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: What you are expecting from Infosys? Are you expecting them to see a cut in revenue guidance this time around?
A: We expect Infosys to cut their revenue growth guidance to around 16-18% versus 18-20% earlier, partly on cross currency impacts, and partly on the fact that there will be some deferment in terms of discretionary projects. The flow through projects from consulting towards outsourcing might not happen, which could be one reason for the cut in their revenue guidance. However, we see its EPS guidance upgrading to Rs 135.
Q: In that case, what do you expect will be the market reaction? Is this very much factored in?
A: In our view, that’s largely factored in the price. We would be buyers if the stock corrects on sentimental disappointment of the guidance cut because the consensus is not building in any outperformance to their earlier guidance.
Q: Would you expect another strong performance from TCS? Will it meet the consensus expectations?
A: In terms of revenues, we see TCS doing better than Infosys, but in terms of margins and profitability, we expect Infosys to do much better. In terms of margins, TCS, in this quarter, is likely to see some headwind of promotions and below-the-line forex losses coming in. However, Infosys should see significant translation gains in this quarter. So, we expect almost 18% outperformance to the earnings guidance at Infosys.
Q: In the entire pack, there are many companies that are relatively un-hedged and will benefit more because the way the rupee has moved. Which ones do you think would be best placed to benefit?
A: From the top-tier universe, Infosys and HCL Tech are hedged lower compared to TCS and Wipro . So, the biggest beneficiary would be Infosys in this quarter because of their lower hedging.
Q: Would you have any favourites in the midcap space, where the billing pressures and volume of work is a little higher?
A: Within the midcaps, we have three stocks under coverage. We have cut on Mphasis and Tech Mahindra . We are neutral on Patni . So, we do not see major upsides in the midcaps from current levels.
Q: HCL Tech has been your top pick, so what kind of target prices do you have on that and do you cover Hexaware because that stock has had a terrific run up until now?
A: No, we do not cover Hexaware. In case of HCL Tech, our target price is Rs 530, which is almost 30% upside from current levels. So, HCL Tech remains our top bet within the top-tier IT because we see revenue guarantee to be the best at HCL Tech. We expect margins to be stable and we expect almost 24% earnings over the next two years for the company. We find the valuations attractive at around 12 times on FY13 earnings.
Q: When Accenture had come out with their numbers, they said that the IT sector is throwing up concerns about reduction in client budgets, etc. There will be a pick up if not just stagnation in some of the client spends. There won’t be any reduction. What is your view on the environment and what are you expecting to hear from the Indian IT companies?
A: From a perspective of this quarter, we do not see any slowdown being visible in the results. Even from a commentaries perspective, we expect status quo in terms of commentaries of Indian IT companies because they do not have to look into budgets for the next year and it’s too early for clients to react to the economic situation.
We expect that there will be moderation in commentaries starting from third quarter onwards and you may see some moderation in growth going into the fourth quarter. So we do see an impact on decision making, which gets stalled. There will be some deferment of discretionary projects. People will take a more or less quarterly approach to spending.
Q: Would it be fair to say that you may find revenues not too disappointing and earnings positive for this quarter, but the markets may not be buoyed because of the guidance?
A: Infosys is unlikely to be worried about the guidance because that’s already built in growth moderation in terms of expectations. So, there will be growth moderation but it will come with cost moderation. So, our estimate on the next year’s margins is actually higher than what we were building in earlier.
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Infosys is expected to announce its second quarter result on October 12. Most experts feel that the recent fall in the rupee will help boost Q2 earnings of the Indian IT companies like Infosys. Ashwin Mehta from Nomura India too feels that Infosys is likely to benefit most from the rupee’s depreciation.
“We expect Infosys to cut its FY12 revenue guidance to 16-18% from 18-20%. However, the company will be able to clock 18% outperformance in the second quarter earnings per share (EPS),” added Mehta.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: What you are expecting from Infosys? Are you expecting them to see a cut in revenue guidance this time around?
A: We expect Infosys to cut their revenue growth guidance to around 16-18% versus 18-20% earlier, partly on cross currency impacts, and partly on the fact that there will be some deferment in terms of discretionary projects. The flow through projects from consulting towards outsourcing might not happen, which could be one reason for the cut in their revenue guidance. However, we see its EPS guidance upgrading to Rs 135.
Q: In that case, what do you expect will be the market reaction? Is this very much factored in?
A: In our view, that’s largely factored in the price. We would be buyers if the stock corrects on sentimental disappointment of the guidance cut because the consensus is not building in any outperformance to their earlier guidance.
Q: Would you expect another strong performance from TCS? Will it meet the consensus expectations?
A: In terms of revenues, we see TCS doing better than Infosys, but in terms of margins and profitability, we expect Infosys to do much better. In terms of margins, TCS, in this quarter, is likely to see some headwind of promotions and below-the-line forex losses coming in. However, Infosys should see significant translation gains in this quarter. So, we expect almost 18% outperformance to the earnings guidance at Infosys.
Q: In the entire pack, there are many companies that are relatively un-hedged and will benefit more because the way the rupee has moved. Which ones do you think would be best placed to benefit?
A: From the top-tier universe, Infosys and HCL Tech are hedged lower compared to TCS and Wipro . So, the biggest beneficiary would be Infosys in this quarter because of their lower hedging.
Q: Would you have any favourites in the midcap space, where the billing pressures and volume of work is a little higher?
A: Within the midcaps, we have three stocks under coverage. We have cut on Mphasis and Tech Mahindra . We are neutral on Patni . So, we do not see major upsides in the midcaps from current levels.
Q: HCL Tech has been your top pick, so what kind of target prices do you have on that and do you cover Hexaware because that stock has had a terrific run up until now?
A: No, we do not cover Hexaware. In case of HCL Tech, our target price is Rs 530, which is almost 30% upside from current levels. So, HCL Tech remains our top bet within the top-tier IT because we see revenue guarantee to be the best at HCL Tech. We expect margins to be stable and we expect almost 24% earnings over the next two years for the company. We find the valuations attractive at around 12 times on FY13 earnings.
Q: When Accenture had come out with their numbers, they said that the IT sector is throwing up concerns about reduction in client budgets, etc. There will be a pick up if not just stagnation in some of the client spends. There won’t be any reduction. What is your view on the environment and what are you expecting to hear from the Indian IT companies?
A: From a perspective of this quarter, we do not see any slowdown being visible in the results. Even from a commentaries perspective, we expect status quo in terms of commentaries of Indian IT companies because they do not have to look into budgets for the next year and it’s too early for clients to react to the economic situation.
We expect that there will be moderation in commentaries starting from third quarter onwards and you may see some moderation in growth going into the fourth quarter. So we do see an impact on decision making, which gets stalled. There will be some deferment of discretionary projects. People will take a more or less quarterly approach to spending.
Q: Would it be fair to say that you may find revenues not too disappointing and earnings positive for this quarter, but the markets may not be buoyed because of the guidance?
A: Infosys is unlikely to be worried about the guidance because that’s already built in growth moderation in terms of expectations. So, there will be growth moderation but it will come with cost moderation. So, our estimate on the next year’s margins is actually higher than what we were building in earlier.
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