Lower Infosys guidance nips early recovery hopes: Jefferies

The lower revenue guidance of Infosys spikes the hopes of early recovery by the global software major, said the American investment bank Jefferies LLC on Tuesday.

"Guidance implies recovery is still a while away. It is lower than the expected growth and a downward reset of the margin brand," said the US-based securities firm in a statement from New York.

India's second largest outsourcing firm on April 13 said its consolidated revenue for the fiscal 2017-18 would grow 6.5-8.5 per cent year-on-year (YoY) in constancy currency (cc) as against the expectations of 7-9 per cent.

"The guidance translates into 6.1-8.1 per cent YoY in dollar terms, with 2.1-2.9 per cent compounded quarterly growth rate (CGQR), which is quite achievable," asserted the statement.

In constant currency, the dollar was Rs 64.85 as on March 31.

The single-digit revenue outlook for this fiscal (2018) is based on 7.4 per cent YoY growth or $10.2 billion, the company posted in the fiscal 2016-17 (FY 2017).

In rupee terms, the revenue growth is projected to be 2.5-4.5 per cent in FY 2018 as against 9.7 per cent (Rs 68,484 crore) annual growth posted in FY 2017.

The lower revenue guidance also stems from flat (0.2 per cent) YoY net profit growth and 0.9 per cent YoY revenue growth for the fourth quarter (January-March) of FY 2017 in rupee terms.

The company had discontinued giving quarterly revenue outlook since FY 2014.

Infosys' guidance disappointed on lower than expected growth and downward reset of the margin band.

Minor misses added up given the 'distractions' the company cited. While guidance adds the 'learnings' from previous quarters, debate will remain on extent of conservatism, given recent slips and low exit rate.

"We revise our estimates for guidance and stronger Indian rupee. FY2018 remains the test even as expectations are low and valuations inexpensive," said Jefferies equity analyst Vaibhav Dhasmana in the statement.

The downward reset of Ebit (earnings before interest and tax) or operating margin band to 23-25 per cent from 24-26 per cent in FY 2017 due to rupee appreciation and increasing local presence in the US is a bigger disappointment, noted the analyst.

"The company's decision to buyback shares from its investors or give them higher (70 per cent) dividend payout as against up to 50 per cent till FY 2017 will provide support although the upward payout under the revised capital allocation policy is not a major change," reiterated the statement.

The city-based company's board has also decided to return $2 billion (Rs 13,000 crore) during this fiscal (FY 2018) to its institutional, retail and promoter shareholders from its cash pile (reserves) of $6 billion (Rs 38,773 crore) at the end of March 31.

"Given the FCF/NP (free cash flow/net profit) conversion of 70 per cent over the past five years, we believe that this is just a change of definition,a observed Jefferies.

The recent (February) tiffs with the company's co-founders on corporate governance also prompted the Board to appoint Independent Director Ravi Venkatesan as its co-chairman, who will with its Chairman R. Seshasayee and Chief Executive Officer (CEO) Vishal Sikka in tandem.

"As the growth context for FY2018 has been set with the guidance, it needs to be monitored, given the 'distractions' the management has cited in its regulatory filing," added the statement.

--IANS

fb/py/vt