Infosys set to reverse underperformance to TCS

Infosys Technologies is likely to see another year of accelerated growth in the coming fiscal after beating its guidance quarter after quarter in this one, as the economic environment improved in North America, its major market.

Analysts also expect the information technology (IT) bellwether’s underperformance to peer Tata Consultancy Services (TCS) to reverse next fiscal with a revival in telecom revenues and higher spend on discretionary services by customers.

Infosys has relatively higher exposure to discretionary projects compared with its domestic rivals.

Brokerage houses tracking Infosys expect the company to forecast year-on-year dollar revenue growth of around 18-20% with a compounded quarterly growth rate of around 3-4% in the next fiscal.

Infosys’ outlook for dollar revenue growth in the current quarter is 1-2% and 25% for the full year, they said.

On the margin front, analysts believe the second-largest IT company could falter with flat or around 100 basis points (bps) lower margins due to higher investment to boost revenue growth and operational costs driven up by wage inflation.

The company could get some relief on margin from the improving pricing, which is expected to move up by around 2-3% next fiscal.

Analysts Kawaljeet Saluja and Rohit Chordia of Kotak Securities in their note to investors on Tuesday said seasonality and weak spending on discretionary projects may keep the growth pinned down in the fourth quarter ending March 31.

“We expect Infosys to guide for 18-20% dollar revenue growth for the next fiscal. This implies compounded quarterly growth of 3.4-4.1%. The guidance may well be lower than our 27% revenue growth projection for the next fiscal, but we take comfort in replacement of the M&A integration opportunity with larger and sustainable regulatory compliance deals, increase in capex spending in some of the drag verticals such as telecom that will drive downstream opportunities and ramp-up from new Fortune 500 relationships signed by the company,” they said.

Citigroup analysts Surendra Goyal and Vishal Agarwal don’t differ much. “We believe Infosys is likely to guide to a revenue growth of around 17-20% in dollar terms, which is 3-4% quarter-on-quarter revenue growth for four quarters of the next fiscal on a base of around 4.5% growth in the four quarters of the current fiscal,” they said in a note on Tuesday. The analysts expect Infy’s margins to decline by 100-110 bps next fiscal due to wage hikes and investments in the business.

Likewise, JP Morgan’s Viju K George and Amit Sharma are also projecting 100 bps slip in margins next fiscal.

Infosys recorded 30.2% operating margins over the last two quarters and analysts estimate it to be about 29.8% for the current fiscal.

“We think commentary on margins will likely point to downward movement of at least 100 bps down for the full year primarily due to wage inflation.  Consensus expects margins to remain flat year on year, which we believe is possible with better pricing (realisation) through the next fiscal,” George and Sharma said.

Ashwin Mehta of Nomura Financial Advisory and Securities said the next fiscal could also be the year when Infosys would catch up with larger rival TCS in terms of revenue growth.

“We believe that Infosys is set to reverse the revenue underperformance trend in next fiscal and that it will post better earnings growth than TCS — 22% vs 14% at TCS in fiscals 2011-13,” Mehta said in a note to clients on Wednesday.
Infy would be able to beat TCS due to telecom revenues, he said.
“Infosys has outperformed TCS in three of four large verticals — BFSI, manufacturing and retail — that together contribute about 70% of revenues at both companies. Telecom is the only vertical where Infosys has underperformed TCS, largely on ramp-downs in the BT account dragging overall last 12 months’ revenue growth by about 2.5%.     

Ex-BT, Infosys’s growth of 16% on a last 12 months’ basis in the telecom vertical is only marginally lower than TCS’s at 21%,” said Mehta.

Over the last three years, Infosys’ quarterly revenue run rates from BT dropped from $100 million in fourth quarter of fiscal 2008 to $30-35 million in third quarter of the current fiscal.

Growing discretionary spends of IT services clients and better operating parameters than TCS would also help Infosys get ahead of it.

“We find Infosys better placed than TCS across operating parameters such as wage inflation outlook, employee pyramid mix, offshoring potential and  utilisation scope,” Mehta said.