Further improvement in Infosys' earnings growth seen: Deven Choksey

Interview with MD & CEO, K R Choksey Securities

Deven Choksey, MD & CEO, K R Choksey Securities shares his view with Tulemino Antao post second quarter earnings from Infosys

What is your reading on second quarter earnings from Infosys and what key factors have been responsible for the same?
The second quarter earnings from Infosys has been encouraging because of growth in constant currency terms, dollar currency terms and also in rupee terms.

Infosys continues to remain conservative with single-digit revenue and dollar revenue growth guidance for the current fiscal. What is your view on this?

Further improvement in growth suggests that it could go into double digit eventually with the focus on deploying innovative platforms and technologies and along with that acquisition of product and businesses in the IT space would lead to higher inorganic growth.

The company has posted 100 basis point sequential expansion in its operating profit margin. Will the company able to sustain margin growth at the current pace going forward?
This has lot to do with the past where IT majors have been fighting for common businesses which Infosys refuses to take on because of the margin pressure. So they ended up maintaining the margins which compromised their growth. However, it could now change with focus shifting to innovative product and technologies.

Although the company had a huge cash pile on its books for long what is your opinion on the surprising announcement of an bonus issue?

There is a marked improvement in confidence as reflected from the corporate actions. Interim dividend along with a 1:1 bonus share issue suggests that the company wants to distribute more rewards to shareholders and in turn effectively passing on the cash they are holding in the balance sheet.

Further, will EPS come under pressure because of expanded equity post the bonus issue with recent reports of global growth slowdown since the company derives most its revenues from exports?
The bonus issue and eventual increase in equity reflects the confidence of the management under the newly appointed CEO and MD Vishal Sikka to deliver high growth, which will take care of equity expansion.

Utilisation rates have been very encouraging at around 82% (excluding trainees). On the other hand attrition rate has edged up to 20% during the quarter. What is your take on the same?
Utilisation has improved largely because of the new contracts that the company has signed up in the recent past. It has started improving the activities and hence the utilisation. As far as attrition is concerned it is mostly related to the recent past following an exodus of top management personnel which also led to resignations by lower management cadre.

Finally, valuations for Infosys have remained stagnant because of growth concerns in the past. However, with signs of earnings growth do you see re-rating of the stock going forward?

Infosys is quoting at a lower P/E whereas some of its peers are quoting much higher. Infosys is now available at attractive valuations. Should they return to higher growth valuations will be extremely rewarding to shareholders.

What is your take on the IT sector and what is your view on the broader market?
With signs of pick up in the demand environment for the IT sector most of the positives seem to have been priced in following gains in stock prices of IT majors.

Near term trend for the market will be dictated by global cues and a mild correction is likely with support for the Nifty seen at 7,800. However, any correction should be used as a buying opportunity to accumulate fundamentally sound stocks. Further, stock specific action will be seen post the earnings announcement.