Infosys: Confusing signals

Analysts divided on whether issues are company-specific or industry-wide.

Infosys has done it yet again. Though the market was prepared for the company’s third quarter numbers, its flat guidance for the fourth quarter has confused analysts. The level of confusion is apparent from the recommendations they are making on the stock. While one brokerage has an “outperform” on the stock, its target price is lower than the current market price.

The confusion is justified because Q3 was good. In dollar terms, the company’s revenues are up 3.4 per cent sequentially to $1.8 billion (Rs 9,298 crore) and volumes are up 3.1 per cent. Blended pricing was also up 80 basis points in constant currency terms. The company has added 49 clients in the third quarter and nearly 120 over the last nine months. Third quarter’s growth was driven by a 17 per cent uptick in Europe. The management in a call with analysts said the pricing environment is stable and it had increased pricing by five per cent year-on-year. Though revenue productivity is up and the company has won two large deals in the quarter ($500 million each), fourth quarter revenues are expected to remain flat.

Infosys has said it is witnessing delays in ramp-ups. Thus, despite winning deals, clients are not scaling up projects, as they are conserving cash in an uncertain economic environment. As a result, FY12 revenue guidance has been revised from 19 per cent growth to 16.4 per cent year-on-year to $7.03 billion. Revenues have grown at an average rate of four per cent each quarter this financial year, with the third quarter clocking 3.4 per cent growth. Analysts are left wondering whether it’s a company-specific issue or a sector-wide problem. Dipen Shah, head of fundamental research at Kotak Securities feels: “The reason behind the muted performance could be a combination of company strategy and event-specific issues. The company is possibly walking away from deals that would impact margins.”

Also, IT budgets are expected to be flat or moderately lower than last year. While a segment of analysts maintain this could well be a company-specific problem, others believe the management’s commentary could be broadly true for the entire sector. Citi says the debate will go on till TCS/Cognizant report their numbers. “We believe it is largely a sector specific demand issue coupled with maybe a company-specific top client weakness issue,” it adds.