Volume growth provided the company solace, but tough times are expected in the coming quarters.
The Infosys scrip seems to have run out of steam. The stock is off the 52-week high of Rs 2,911 it touched on Monday. With a consensus estimate of Rs 122 earnings per share (EPS) in FY11, the price to earnings is pegged at 23 times, say analysts. This is a premium of 15-20 per cent to the market, and is likely to be maintained, as the company continues to generate free cash flows and has a return-on-equity of around 30 per cent. Not many companies which expect revenue to grow at a compounded rate of 20 per cent in the next three years would have these numbers.
However, the upside movement for the stock is seen to be limited. Operating profits margins, around 31.6 per cent, are lower by 251 basis points over the year-ago quarter, but are among the highest when compared to peers like TCS and Wipro. Given this, there is little headway for margin expansion. Utilisation rates have risen from 69.3 per cent (including trainees) in the December 2009 quarter to 73 per cent (78 per cent if trainees are excluded). The management says the best the company has recorded has been around 81 per cent. This means there is little room for increasing productivity, not to mention a rising attrition rate.
Given a scenario where pricing levels are seen almost flat, margins will be under pressure. Currency fluctuations, which knocked 90 basis points off profit margins, will continue to put additional stress. Volume growth is, therefore, expected to bring some solace. The management has guided a higher 19-21 per cent revenue growth in constant currency terms for the current financial year. Moreover, analysts reckon that a change in the product mix, with a higher share of consultancy (25 per cent of revenues), could add the surprise factor, as it is a high-margin business compared to application development and maintenance.
A depreciating rupee will also be another trigger. Analysts at Citi reckon, “We believe EPS upgrades (barring currency-related), if any, are unlikely to be seen until the September quarter results.”