St pricing in Infy’s return to growth

Infosys Technologies, India’s second-largest software exporter, is expected to post a revenue growth of 2.7 per cent for the September quarter vis-a-vis the June quarter, according to the average of estimates of seven brokerages.

This is better than the guidance of a 2.8 per cent-1.1 per cent sequential decline in revenues in rupee terms given by the company.

Surendra Goyal and Vishal Agarwal of Citigroup expect Infosys to grow by about 3.5 per cent sequentially, the highest within the Tier-1 universe. “However, expectations remain high following comments in the press by the head of HR that utilisation has moved up,” Goyal and Agarwal wrote in a note to clients on October 5.

Favourable currency movement — depreciation of the US dollar against euro and the British pound during the quarter — should help revenue growth. In the September quarter, the euro and the pound rose by an average 4.7 per cent and 5.9 per cent, respectively against the dollar.

According to analysts, Infosys bills about one-fourth of its invoices in non-dollar currencies and is expected to benefit by 1.5 per cent due to cross-currency movements. Stable pricing scenarios and increase in volumes augur well too, as do the higher number of working days in the September quarter.

According to Manoj Singla of J P Morgan, Infosys should see a 3-4 per cent QoQ increase in US dollar-based revenue (compared with a guidance of 1 per cent decline to 1 per cent growth), partly helped by cross currency movements (around 1 per cent).

Broadly, operating margins are anticipated to take a hit on account of higher intake of freshers and deferred sales and marketing spend. Margins are expected to decline by 32-150 basis points (100 basis points make one percentage point).

Ashwin Mehta and Vihang Naik of Motilal Oswal expect operating margins to be flat. “Ebitda (operating) margin is expected to be flat sequentially at 34.1 per cent. We expect higher SGA (selling, general and administrative) and overseas hiring costs to be countered by utilisation improvement due to on higher volume growth and cross-currency benefits,” Mehta and Naik of Motilal Oswal wrote in a note to clients last month.

In the last couple of quarters, software-exporting companies have tried to increase their profitability and boost margins through aggressive cost cutting. In the December quarter, for example, Infosys had posted a multi-year high in operating margins of over 35 per cent, thanks mainly to cost reduction initiatives.

However, this cannot go on forever because there is a limit to which a company can cut costs. Software companies have utilised all the major tricks in their bag, including raising the share of offshore revenues to increasing the percentage of revenues earned through fixed-price projects and improving utilisation rates.  

Any further expansion in margins through cost reduction appears unlikely now.
At the net profit level, Infosys is expected to post a 1.8 per cent decline over the June quarter, under the impact of poor operating performance and the extent of forex loss.

Analysts expect Infosys to raise its guidance for the current quarter.

Mehta and Naik of Motilal Oswal expect Infosys to upgrade its full-year US-dollar revenue growth guidance to flat against a 3.1 per cent-4.6 per cent decline and its full-year earnings per share (EPS) guidance to Rs102 from Rs93-96 earlier.

“While it (the company) may not yet upgrade its topline guidance for the fiscal, in line with its stance of being conservative, we believe that an upgrade on the EPS front is a distinct possibility, given our expectations of a significant 7 per cent beat on the upper end of its September-quarter EPS guidance,” Harit Shah and Vibha Salvi of Angel Broking wrote in their September quarter preview.

The quantum of EPS upgrades is likely to be the key driver for Infosys’ stock in the medium term.

Goyal and Agarwal of Citigroup maintain that markets are factoring in a return to growth and any disappointment could be a negative for both the sector and the stock, which currently trades at Rs2,211.25 per share.