With Infosys Technologies Ltd trading at a valuation of nearly 25 times FY10 earnings, one would have imagined that expectations from its annual growth guidance will be running high. But a recent poll of institutional investors serviced by Citigroup Inc. shows that the markets are expecting Infosys to guide for 15% revenue growth in dollar terms, and a growth of less than 5% in its earnings per share (EPS, in rupees).
This is considerably lower than analysts’ consensus estimate of revenue growth of over 20% and growth of 13-14% in EPS.
Graphic: Naveen Kumar Saini / Mint
Despite this large gap, Infosys’ guidance will not be seen as a reality check since the markets have already factored in conservative guidance from Infosys.
Consider this statement from a CLSA Research report: “Infosys may well err on the side of caution with an initial 14-15% year-on-year revenue growth outlook (in dollar terms) for FY11, but we consider 23-25% revenue growth with flat margins a likely end game.”
And a similar one from IIFL Cap: “We believe Infosys’ guidance for FY11 will fail to indicate the strength in the demand environment.” IIFL expects Infosys to guide for 14.5-16% growth in revenue, although it believes that under realistic assumptions growth would be around 22%. In other words, it doesn’t matter much what the firm’s guidance is.
Infosys normally keeps a buffer when it gives its guidance so when it announces a growth target of 15%, the markets assume that the internal target is 18%.
Analysts’ estimates are even higher this time around because of their belief that the demand environment will improve as the year progresses. Infosys, on the other hand, is likely to be cautious about the second half of the year, owing to the uncertainty of the global economic recovery.
What if Infosys guides that growth would be much lower than 15%? In that case, the stock would fall. But that’s not going to happen.
Industry body Nasscom has already projected for growth of 13-15% for FY11 and Infosys is not expected to announce that it’s expecting to grow at a lower rate compared with the industry.
There isn’t likely to be much of a surprise on the upside either, keeping in mind Infosys’ traditional conservatism. Keeping this in mind, the street may watch out for the guidance for the June quarter, apart from the growth recorded in the March quarter. This will indicate the strength of the recovery. Growth of 4-5% in the March and June quarters will confirm the markets’ belief that the recovery is strong.
Current valuations presuppose relatively strong growth in earnings in the next few years.
Note that even if revenue grows upwards of 22% in dollar terms, growth would be lower in rupee terms owing to the appreciation in the rupee.
According to an analyst, margin levels are limited considering that the top three firms are currently operating at peak margins owing to aggressive cost cutting. Earnings growth in rupee terms, therefore, is not going to be as exciting. Infosys’ earnings are expected to grow by 18.5% between FY10 and FY13, according to estimates by Kotak Institutional Equities.
The only reason information technology stocks continue to trade at rich valuations despite the recent appreciation in the rupee is the lack of reasonable alternatives in the Indian markets.
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