Over the last year, Infosys Technologies maintained a cautious stance on the business prospects of the technology sector, as the world teetered on the brink of a collapse. Analysts seem to believe it has now resolved most issues and could positively surprise the markets with its FY13 guidance.
The flow of positive data from the US, probably, makes this a convincing argument. First, pricing is not under pressure and, second, clients are not cutting budgets drastically, even if they are not increasing these. Analysts say the Infosys management has conveyed that it intends to lead the industry in terms of both revenues and margins.
Analysts have gone back to the drawing board to come up with fresh estimates on the company’s FY13 performance. Pankaj Kapoor of Standard Chartered sees FY13 dollar revenue growth guidance in the 13-16 per cent band (vs Nasscom’s 11-14 per cent range for the sector) and ahead of the consensus estimates of 13 per cent FY13 revenue growth forecasts.
The outlook has turned positive after a series of downgrades last year, as the Street expects the pricing environment to be stable. Morgan Stanley, which expects Infosys to deliver an 18 per cent year-on-year growth, believes a guidance of over 16 per cent y-o-y dollar revenue growth for FY13 in April could ease market concerns around growth and profitability and be a key trigger for the stock.
So, where’s the downside risk? A few fundamental changes seem to be sweeping through the industry and these will impact the bellwether, too, experts believe. For starters, though budgets are set, actual spending could remain volatile. This effectively means it would be increasingly difficult to give a quarterly guidance if there is volatility in spending. Analysts believe the company could benefit if it moves away from its “high profile” quarter-on-quarter guidance and towards a full year guidance.
Apart from this, deal tenures in verticals like manufacturing have also made it difficult to get a long-term perspective on the sector’s performance. However, analysts believe the company is back to focusing on basics and this is helping deal flow. According to Barclays, Infosys has a leadership position within the vertical, being the largest partner for each of the top-five customers. Manufacturing now accounts for 20 per cent of revenue from 13 per cent four years ago. The report adds, “Manufacturing has been the fastest growth vertical for the company (6.5 per cent compounded quarterly growth rate since March ’07) and the base effect of this could cause a slowing of growth relative to other verticals. However, increased outsourcing within the sector and Infosys’ positioning (account and product strategy) should imply enough drivers to sustain medium- to long-term growth.”