Infosys proves IT no safe haven for investors.

infosys office
Infosys’s March quarter results announcement establishes that the company’s better-than-expected performance in the December quarter was a flash in the pan.

Revenue surprisingly fell by 0.2% to $1.87 billion in organic terms, i.e. excluding revenue added through the acquisition of consulting firm Lodestone Holding AG. Analysts at JPMorgan and Kotak Institutional Equities had estimated organic growth at 2.4% and 2.8%, respectively, for the March quarter, which shows the stark difference between the Street expectations and reality.

What’s more, the company has missed its organic revenue growth guidance of 5% for the full year. Revenue grew by just 4.2% in fiscal 2013 (FY13), excluding revenue from Lodestone. The company’s guidance for FY14 shows that it doesn’t expect things to improve soon. Infosys expects revenue to grow between 6% and 10% in FY14, and the lower end of its guidance is substantially lower than Nasscom’s IT exports revenue growth target of 12-14% for the year. The Lodestone acquisition will add about 2% to revenue, which means the company expects organic revenue growth of only 4-8%. Excluding FY10, when the impact of the financial crisis was at its peak on the IT industry, this is the weakest guidance in the company’s history.

There is little doubt that the company is to blame for missing its own guidance and lagging behind peers by a significant margin. But investors have themselves to blame for the sharp 17.5% (Rs.29,000 crore in market capitalization) correction in the company’s value. The 25% jump in the company’s shares since the December quarter results announcement was clearly overdone.

While the third quarter results were impressive, it had signs that growth may not sustain. For instance, sequential volume growth was just 1.5% in the third quarter. And growth was helped by unusually high jumps in the India business (up 17%), business process outsourcing (up 12.9%) as well as the Finacle business (up 7%). Pointing out all this in a call with analysts, chief financial officer Rajiv Bansal had said, “If you look at it, challenges remain because volume growth is 1.5%; (a 1.8% increase in) pricing helped us. As we go into Q4, challenges remain.”

Even now, after the sharp drop in the stock, valuations aren’t cheap at 14.5 times trailing earnings. According to reports, Infosys has become more flexible with its pricing, which means earnings growth is likely to be lower than its anaemic revenue growth rate. And as the correction in other IT stocks shows, investors are in no mood to make portfolio shifts within the sector. IT valuations have sustained at high levels because of a lack of decent alternatives in the domestic market. Infosys’s results have proved that the sector is no safe haven.

 

Source : LiveMint.

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