Expectations Rise High About Infosys’ Results

Infosys will announce their Q2FY13 results tomorrow before the market opening. There was a lot of movement in the stock today over speculation of how the results would be. The stock price closed at Rs 2,504.25 a piece yesterday and the intraday high today was 2.90 per cent above yesterday’s closing and the intraday low at 0.89 per cent below yesterday’s closing. Analysts overall have been expecting a topline growth of 3 per cent QoQ.

Infosys has been disappointing over the last three quarters in terms of revenue growth and guidance. In Q1FY13, the company revised its annual guidance for FY13 to as low as 5 per cent from an earlier 8-10 per cent. This is way below NASSCOM’s growth estimate for the industry which stands at 11-14 per cent. Moreover, Infosys didn’t give any growth guidance for Q2FY13 in the previous quarter. The stock price of Infosys had tanked 9.17 per cent on this day.

Q2FY13 has been no different than the previous quarters as far as the macro-economic situation goes. The scenario still remains gloomy globally and problems revolving around IT spending cuts and delayed decision-making continue to exist. However, the September quarter is a seasonally strong quarter and the following two quarters are usually weak due to a global holiday season and uncertainty over IT budgets. Following this trend, better results can be expected out of Infosys on account of cyclicality.

In terms of the rupee however, there seems to be ambiguity over how this would affect the financials of Infosys. It does stand true that the rupee depreciated by 10.20 per cent in Q1FY13, thus benefiting exporters and boosting financials, and that the rupee has appreciated by 5.95 per cent, thus building an image of a negative impact. However, the fact is that while the average price of the dollar in Q1FY13 stands at Rs 54.22 per USD, it is higher in Q2FY13 at Rs 55.24 per USD. This is mainly because the rupee started gaining strength towards the end of the quarter. This becomes evident considering the fact that the median rate of the dollar was Rs 55.45 per USD in Q2FY13 as against Rs 54.68 per USD in Q1FY13. Thus, this quarter too would witness a positive impact of the rupee on the financials.

However, since the strengthening of the rupee has begun, it has picked up pace and there is a possibility that Infosys will reduce its rupee guidance from the current 19.70 per cent (Rs 40,364 crore). On the announcement of Q1FY13 results Infosys had increased its rupee guidance from 13.9-16 per cent to 19.70 per cent with a negative approach on the rupee. This situation now seems reversed.

Apart from the topline and the effect of the rupee, what investors need to watch out for in the results is if the company has become flexible in terms of pricing. A look at the margins would give a clear picture on whether the company has bent a tad on its premium pricing in order to see growth. Infosys has an operating margin of as high as 32.19 per cent as compared to the average operating profit margin for large-cap IT companies which stands at 27.04 per cent. This average for mid-caps, which have been outperforming, stands at 21.05 per cent. Investors have been longing for flexibility on pricing.

There is also a possibility of Infosys raising wages for its employees, something it had not done at the beginning of this year while the other IT companies had. A view on attrition rates and hiring plans would also highlight the outlook of the company. Other things apart from guidance, margins and wage raise would be client additions and the company’s outlook on spending and demand.

There has been an increasing likelihood of Infosys realising benefits from its Infosys 3.0 strategy that focuses on transformational projects and emerging areas such as cloud computing, mobility, etc. Whether the growth pill is working would be clear from the topline of Infosys. If the results or guidance do come out below expectations, the stock price of Infosys is likely to see a heavy downfall as in previous times. This would also be because of the fact that stock prices have corrected themselves from the fall seen in the previous quarter and a negative result would increase the gravity of the fall.

Overall, we think the new strategy and the acquisition of Lodestone, which is in line with the strategy, would pan out in the long term and maintaining the stance we took in the previous quarter’s results, we recommend investors to accumulate the stock to benefit in the long run. Do keep an eye for our report on the results tomorrow.