What will be Infosys’s forecast?

Come Friday, all eyes will be on Infosys Ltd’s revenue forecast for the year ending 31 March 2013. It’s quite likely that the lower end of the company’s revenue growth forecast in dollar terms may be in single digits at 9%. Needless to say, if this happens, it will affect the sentiment for the stock and, to some extent, the sector.

According to a note by Barclays Securities (India) Pvt. Ltd, “Infosys is expected to guide for FY13 revenue growth in the broad 10-15% range to incorporate macro uncertainty and the shortened tenors of the projects.” Note here that industry body Nasscom had said that the industry’s exports are expected to rise between 11% and 14% in the year till March 2013. Some brokerages such as JPMorgan India Pvt. Ltd expect Infosys to predict 12-15% growth, slightly higher than Nasscom’s growth estimates for the industry. This is based on the view that the company wouldn’t want to be seen growing at less than industry average growth rates. But as analysts at IIFL Capital correctly note, Infosys hasn’t shied from forecasting below industry average growth rates in the past. Given the current uncertainty, this time should be no different.

What’s more, its track record of meeting forecasts has been quite poor in the recent past. It has missed the mid-point of its guidance range twice in the past four quarters and is set to miss the lower end of the FY12 revenue target it had set last April. In this backdrop, one would imagine Infosys will get more conservative with its forecast for FY13. Analysts at Kotak Institutional Equities say that their base case expectation would be for 9-12% revenue growth. This will require a quarterly average growth of 2-3% in each of the four quarters of FY13. To assume a higher quarterly growth rate in the current environment will be fraught with risks.

And even if Infosys is willing to stick its neck out and say that it expects a higher growth rate, investors will do well to take those statements with a pinch of salt, especially keeping in mind the company’s guidance misses lately.

True, analysts have been gradually trimming down estimates and now estimate revenue growth of roughly 13-15% for FY13. So, one can argue that even if Infosys forecasts 9-12% growth, the difference isn’t huge. But, as pointed out earlier, a growth target in single digits will put off investors, especially keeping in mind the company’s valuation of 19 times FY12 earnings, and also the fact that competitor Cognizant Technology Solutions Corp. has guided for a growth of at least 23% for the year till December 2012. Three months ago, Infosys’s muted guidance for the March quarter had spooked information technology investors. Will there be a repeat this time around?

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