MERRILL LYNCH on Infosys

Infy could dampen sentiment by giving a FY11 guidance of 13-15% in dollar revenue growth and 5-7% in rupee EPS growth versus consensus revenue growth estimates of over 20% dollar revenue growth and 13% EPS growth. Merrill Lynch believes Infy's guidance will factor in: a) cautiousness in a fragile macro environment, b) currency appreciation, c) risk to wages from industry-wide rising employee attrition, and d) a 3-4 pp increase in tax rate. In the past nine years, the stock has underperformed in the run up to guidance. Merrill Lynch's expectation of a modest guidance is based on: a) A fragile macro environment and Infy's track record of being cautious, b) A 1-2% hit to US dollar revenue due to the dollar's strength versus the pound and euro, c) risks to wages from rising employee attrition, and d) 3-4 pp higher tax rates. Infy could offer comfort in a relatively strong Q1 rev growth guidance of 2-3% q-o-q in dollar terms but EPS growth guidance is likely to be flat to negative given likely wage hike and visa charges. Merrill Lynch's channel checks and conversations with heads of banking, manufacturing and retail, which account for over two-thirds of Infy's revenues, suggest strong demand momentum. Integration-led work in banking should continue in FY11, discretionary work is picking up and pricing is stable. The seasonally weak Q4 could see dollar revenue growth at 3-4% q-o-q, stronger than the 1% guidance and Merrill Lynch's forecast 7% rupee profit.