Stock Review: Infosys

THE result season is back and, as always, it will be kicked off with IT bell weather Infosys Technologies announcing its results on April 15. Infy's report card is important not only because of its size, but also because a lot of expectations have been built around the company's strategy and internal restructuring.

Even though the company gave a rather muted guidance of 1-2 per cent sequential growth for the fourth quarter, the Street is expecting the company to beat its own forecast as it has done always. The optimism is due to an improvement in the business momentum across business verticals and geographies, indicating increase in IT spends. The management has conveyed to analysts that spends on consulting and implementation will improve over the next 12 months.

Motilal Oswal is modeling Infy's revenue growth at 4 per cent in the fourth quarter, better than the company's guidance. This, however, according to analysts, is lower than the 5 per cent revenue estimate for TCS in the same period. However, if Infy gives a USD revenue guidance of 1719 per cent and rupee earnings per share (EPS) guidance of 14-16 per cent, the stock would be a good buy.

A report by a foreign brokerage house, says: "Infosys has been the worst performing large cap IT stock in the last three months. It is now at 10 per cent PE discount to TCS, with similar FY12 earnings before interest, taxes, depreciation and amortisation (Ebitda) growth and higher EPS growth forecast." If FY12 guidance is in line with the market's expectation and the company outperforms its fourth quarter guidance, then the trend could well reverse for Infosys. The Street expects the company to bridge the PE discount to TCS, given similar Ebitda growth forecast.

Even as the pressure of wage inflation is likely to rear its ugly head again, analysts claim the company expects levers such as employee pyramid, scale benefits, non-linearity and improvement in the margin of subsidiaries to cushion the impact. While some pricing power has returned to the industry, it is not expected be have a big positive impact. According to a report by Motilal Oswal: "Infosys expects like to-like pricing to stay stable with a mild upward bias, compared with peers like TCS and Cognizant, which expect low to mid single-digit pricing up-tick during the year."