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Infosys could be the fastest growing IT company this FY

Last updated on: January 15, 2016 09:19 IST

A key positive in the results is the increasing management confidence on the road ahead.

Infosys campus.

 

Contrary to the weak show posted by larger peer, Tata Consultancy Services, Infosys put up robust numbers for the quarter ended December. Infosys' financial performance has been improving in recent quarters.

A key positive in the results is the increasing management confidence on the road ahead, reflected in upward revision of the full-year revenue forecast by the company.

This is significant when viewed in the context of the cautious optimism adopted by the management at the end of the September quarter.

It had then cited issues with some clients as a key pressure point.

In a post-results call with investors on Thursday, Infosys indicated most of those issues had been sorted.

It expects constant currency revenues to grow between 12.8 and 13.2 per cent this financial year, compared to its earlier expectation of 10-12 per cent.

It is not surprising that the scrip surged four per cent in Thursday’s trade versus a flattish Sensex.

“We believe Q3 results could lead to three-four per cent financial year 2017-18 consensus earnings per share upgrades and also higher valuations for Infosys,” write analysts at BNP Paribas.

At the revised forecast, Infosys could be the fastest growing information technology company this financial year.

Nitin Padmanabhan, technology analyst at Investec says, “We believe Infosys should post above-industry growth this financial year itself if it delivers the revised revenue guidance".

The company is among his top picks in the sector, along with Wipro.

After posting a weak set of numbers for the quarter, the TCS scrip made new 52-week lows repeatedly on Wednesday and Thursday.

The stock, trading at premium valuations vis-a-vis Infosys at the start of this month, has witnessed a reversal in this trend as analysts trimmed their earnings estimates for TCS.

So, from a premium of about four per cent earlier this month, TCS now trades at a discount of 1.3 per cent to Infosys on a price/earnings basis.

At current levels, TCS trades at 16.9 times FY17 estimated earnings, while Infosys trades at 17.1 times FY17 price/earnings ratio.

However, sustained improvement in Infosys' financial performance is a pre-requisite for this valuation premium to continue or even expand from current levels, believe analysts.

Some analysts, though, are more optimistic.

"We believe Infosys’ valuations can further re-rate over the medium term and trade at premium to peers on the back of robust earnings growth in coming years," adds Rajiv Mehta, IT analyst at IIFL.

He has raised Infosys' earnings by two-three per cent and target price by 10 per cent to Rs 1,350.

For the December quarter, Infosys' revenues grew 1.7 per cent sequentially to Rs 15,902 crore aided by a healthy volume growth of 3.1 per cent, despite a 1.5 per cent dip in realisations.

Growth was fuelled by healthy traction in India business (albeit on a lower base) and Europe (up 3.9 per cent sequentially), even as North America was flat at 0.5 per cent.

Most verticals grew at a healthy clip of three per cent sequentially.

Revenues were slightly higher than the Bloomberg consensus estimate of Rs 15,758 crore.

Net profit was partly aided by a 177-basis-points sequential fall in tax rate to 27.2 per cent in the quarter.

Net profit grew two per cent sequentially to Rs 3,465 crore and was ahead of the Bloomberg consensus estimate of Rs 3,351 crore.

Infosys' operating margin fell 64 basis points sequentially to 24.9 per cent on the back of weak pricing and utilisations even though a weaker rupee and lower attrition provided some relief.

Going forward, management has maintained its near-term margin guidance of 24-26 per cent and believes it is on track to ramp up this metric to its aspirational 30 per cent level by 2020.

Image: Infosys campus. Photograph: Reuters

Sheetal Agarwal in Mumbai
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