Infosys Pre-Result Update

The two largest IT companies by market capitalisation, TCS and Infosys are announcing their results for Q1 FY 2012-13 tomorrow. TCS does not give guidance figures, either quarterly or annually, like other IT majors. Earlier in the year, they had expressed their confidence in beating NASSCOM’s guidance for the industry for FY 2012-13, which stood at 11-14 per cent. The annual guidance announced by Infosys for the same period was in the range of Rs 38,431 crore and Rs 39,136 crore which, in terms of YoY growth percentage, is between 13.92 per cent and 16.01 per cent, with FY 2011-12 revenues reported at Rs 33,734 crore - also above NASSCOM’s guidance. Their dollar guidance though is in the range of 8-10 per cent which is below NASSCOM’s guidance.

There has been much talk over global IT spending cuts and delayed decision-making leading to subdued demand from the U.S. and Europe which account for most of the revenues for a majority of the IT companies. In the case of Infosys, this resulted in actual revenues of Rs 8,852 crore, missing the guidance of Rs 9,391 crore to Rs 9,412 crore. This led to worries among investors over the demand of IT products and services over the coming quarters.

Moreover, when giving out the guidance for Q1 FY 2012-13, Infosys announced an estimate of Rs 9,011 crore to Rs 9,100 crore, which is higher than the actual revenues for the previous quarter but is lower than their earlier guidance. This further added to the demand woes.

Over the last two years, after every quarterly result, stock prices have moved in the negative if,

1. Guidance for the quarter has been poor
2. Actual revenues posted have been lesser than the guidance limits
3. Guidance growth is good and actual revenues are higher but this is due to a depreciating rupee and not real value addition - the rupee having depreciated by 3.92 per cent in Q2 FY 2010-11 and by 7.77 per cent in Q3 FY 2011-12.

Understanding the logic behind guidance versus actual revenues in terms of dollar conversion leads to a better view on the whole subject. When actual revenues are posted, a depreciating rupee benefits the firm due to the fact that a majority of the revenues result from overseas sources.

For Q1 FY 2012-13, the real growth in IT spending is expected to be 5 per cent for software and 1.30 per cent for IT services, sequentially, according to Gartner, which is way lesser than 6.40 per cent for software and 3.10 per cent for IT services for Q4 FY 2011-12. Garter also estimates Consulting to grow by approximately 3.8 per cent over the year.

We expect the revenues posted for Q1 FY 2012-13 to be Rs 9,612.84 crore, which is more than the estimates but the rupee has depreciated by 10.07 per cent over the quarter. Considering these factors, we expect the stock prices of Infosys to slump on the announcement of the results.

Apart from this, there is speculation in the market of a possible share buyback to the extent of Rs.2,215 crore and an announcement regarding the same tomorrow. If this does happen, the effect of the result would be a little subtle.