Infosys may beat upper end of its revenue guidance in FY14

Improved demand environment in US, cost-cutting, robust deal pipeline to help company revive growth

There’s nothing official about it yet, but it appears that NR Narayana Murthy may put life back into Infosys. The company’s CEO D Shibulal has painted a relatively more optimistic picture to investors and analysts last week. After its mid-quarter interaction with analysts, it is widely believed that Infosys will be able to beat the upper end of its full year revenue growth guidance of 10%. Infosys, which has been lagging its peers in terms of growth rates, could be a candidate for an upgrade if it demonstrates such a possibility in the second quarter. In the first quarter, the company’s revenue grew 2.7% ($1.99 billion) sequentially in dollar terms and 3.4% in constant currency. This was well ahead of analysts’ estimates. Now the market is factoring in double digit revenue growth for the full year. 

 

After interacting with the management, analysts are convinced that the recovery in the US and pick-up in discretionary spends will help the company beat the guidance. For starters, Shibulal has conveyed that there is traction in the financial services side as well as infrastructure management services (IMS). 

 

From seeing volatility and risks everywhere, the management is seeing growth in his key market – the US. According to Edelweiss Securities, not only is the demand environment is improving, the traction in the financial services vertical is led by pent-up demand. This is driving the confidence that the company may beat the upper end of its growth guidance (10%). Discretionary spending too is showing a pick-up, but neither the company nor analysts are willing to call this a secular trend yet. 

 

With the environment improving, the Street expects the operating metrics of Infosys to also improve. Its utilisation levels have been lower than peers on poor deal flow and poor execution. However, this too would change once the company starts winning deals.

 

 In the first quarter, the company’s utilisation improved 290 basis points to 74.3%. If deal traction happens, then this could improve to 78-80% levels too. 

 

There is every chance of this happening as the company has conveyed that the deal pipeline is looking good and it is working on improving execution. New deals are critical as it brings revenue visibility. Deals worth $2 billion signed last year are helping the company this year. 

 

Analysts believe that if the company has to grow revenues by 15% next year, total contract value (TCV) of new deals should be $2.7 billion in FY14. Infosys has announced TCV of $600 million in Q1FY14. Kotak Institutional Equities believes margins for Infosys can start increasing from the second half of this fiscal as cost rationalisation measures would start reflecting. “Our assumption of 90 basis points margin increase to 27.1% in FY2015 has potential for upward revision,” the brokerage adds.