BackMark to Market | Will Infosys deliver?
Even if the firm is able to match its peers on growth, it’ll be naïve to assume this will be sustainable
PremiumInvestors must look closely at the margins to see if reports about the company’s flexibility with pricing are true.
Photo: Mint
(Mint)
Infosys Ltd shares have risen by 18% from its lows in July and have outperformed Tata Consultancy Services Ltd’s shares by nearly 10%. TCS’s remarks last month that its growth in the September quarter is likely to be slower than the June quarter helped Infosys shares to some extent. But investors are mainly enthused about the prospects of a revival in the company’s growth rates.
The moot question is whether the company will deliver, after having disappointed investors for three successive quarters. A number of analysts are expecting the company to report sequential revenue growth of over 4% in dollar terms. This will put it on par with TCS and HCL Technologies Ltd, which have led in terms of growth in the preceding quarters. But even if the company is able to match its main competitors on growth in the September quarter, it’ll be naïve to assume that this will be sustainable. Besides, investors must look closely at the margins to see if reports about the company’s flexibility with pricing are true.
One should also keep in mind that Infosys’s June quarter revenue was hit by a one-time write-off of $15 million. Therefore, the reported growth rate needs to be adjusted by 90 basis points to arrive at the real underlying growth. On an adjusted basis, the company’s growth is still likely to be lower than peers. One basis point is one-hundredth of a percentage point.
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However, if reported growth itself turns out to be around 3% (which implies underlying growth of 2.1%), the Street will be disappointed. This will mean that even the annual growth target of 5% will be difficult to achieve on an organic basis. This is because the September quarter is a seasonally strong quarter and it may be difficult to expect similar growth in the following two quarters, when demand has traditionally been relatively lean, owing to more holidays and uncertainty related to the new year’s IT budget.
Needless to say, in such a scenario, investors will have no one but themselves to blame. They have set themselves up for disappointment, with Infosys shares having recovered all of the losses since the disastrous June quarter earnings announcement, when it had cut its annual revenue growth target to just 5%.
June quarter margins should also be adjusted for the write-off to ensure a fair comparison. If the company impresses on volume and revenue growth, but has had to take a big hit on pricing and margins, the stock may well react negatively.
The company is also expected to increase wages, which will affect margins and earnings expectations. With the rupee having appreciated considerably, earnings per share are expected to be reduced in any case. What investors should watch out closely for is the extent of downward revision and if margins are coming under pressure also because of flexibility on pricing by the company.
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