BackInvestors cheer Infosys’s upbeat guidance
Infosys's guidance reflects far greater confidence and suggests that it expects the momentum in its growth to continue
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Infosys Ltd’s March quarter revenues have grown by 1.6% sequentially to $2.446 billion, slightly lower than the Street’s expectation of 1.9% growth. Profit margins were higher than expected, but largely because of a squeeze on hiring and partly due to a write-back of provision for doubtful receivables. The key US market grew just by 0.6% in constant currency terms. And banking and financial services, the largest vertical for the company, grew just 0.2%.
If Tata Consultancy Services Ltd (TCS) were to announce on Monday results similar to the one Infosys did on Friday—revenue growth missed estimates and key business segments were struggling for growth—its stock would be punished. Infosys’s American Depository Receipts (ADRs), on the other hand, were up 8% on the New York Stock Exchange at 8.20pm IST. The company has momentum on its side, and investors are willing to excuse a slight miss on growth expectations after three successive quarters of above-par performance.
Besides, TCS shares had outperformed in the past month, and now trade at a slight premium to Infosys based on fiscal year 2016-17 estimates. The rally in Infosys ADRs is partly to make up for recent underperformance.
Also, the company has guided for constant currency growth of 11.5-13.5% for FY17, slightly (50 basis points) higher than the Street’s expectation. Earlier this year, Cognizant Technology Solutions Ltd guided for growth between 10% and 14% for 2016. The wide range suggested greater uncertainty about demand for IT services in the current year.
Infosys’s guidance reflects far greater confidence and suggests that it expects the momentum in its growth to continue.
A year ago, when the company said it expects constant currency growth of 10-12%, a number of analysts dismissed it as a far too ambitious target. But Infosys ended the year, the first full year under new chief executive officer Vishal Sikka, with 13.3% growth.
Analysts at Kotak Institutional Equities said in a recent note to clients: “Key changes, under the leadership of Dr Sikka, to the approach and response to RFPs (request for proposals), emphasis on innovation and scrutiny of the CEO and COO of large deals, have improved the success ratio in large deal wins and account mining. The benefits of these changes will continue."
Infosys said it won new deals worth $2.8 billion last year, which is 45% higher compared with the deal wins in the preceding year.
Under a new leadership team, Infosys has managed market share gains with its growth now well above that of TCS. The company’s revenues grew by 13.3% on a year-on-year basis last quarter, while TCS is expected to report growth of less than 8%.
A number of analysts believe that the trend of market share gains should continue, which in turn will help the company offset headwinds such as the drop in IT spending in the key banking and financial services vertical.
Kotak’s analysts say, “Broader market challenges in the banking vertical may result in some pushback of IT spend and longer decision cycles, although market share gains will neutralize some of the challenges for Infosys."
The company’s 2016-17 guidance reflects this confidence, which will please investors, notwithstanding the fact that the March quarter results were not exactly impressive.
The writer does not have positions in the companies discussed here.
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