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Infosys' dismal show in the March quarter coupled with lower than expected revenue guidance for the full year indicate that the company's turnaround may take longer than anticipated. The stock which was once the darling of the markets is now the least preferred stock of brokerages in the IT sector. The company has underperformed street's estimates for the past 8-10 quarters. Unlike peers such as TCS, Cognizant and HCL Tech, Infosys management continues to be cautious as it battles multiple headwinds. Lower revenue visibility, uncertainty on margins and continued weakness in discretionary spending are the key concerns and are unlikely to get resolved quickly. This is reflected in Infosys’ Dollar revenue growth guidance of 6-10% for FY14 – which is lower than Nasscom forecast of 12-14% growth for the industry. Infosys' clients' budgets are likely to be flat with a negative bias, the management indicated.
“Infosys' FY14 Dollar revenue guidance of 6-10% growth is a very wide range offering no comfort. We expected guidance to be at least 10%. The exit rate itself (Q4FY13 quarterly annualized revenues) should provide 4.8% year-on-year revenue growth without any sequential increase in FY14. The guidance implies CQGR of 0.5-2.0% sequentially for FY14, which is very weak”, believes Viju K George, IT analyst at JP Morgan.
Another concern for Infosys is the dragging organic growth. In the March quarter, out of the 1.4% sequential growth in Dollar revenues, about 1.3 percentage points came in from Lodestone acquisition, implying negligible organic growth. Analysts believe the company is not in a position to assess future revenue growth accurately.
"We are not clear why Infosys has not been able to gauge its cost, hiring or earnings outlook (costs are largely in its control) but has tried to estimate revenues, which are more dependent on the macro and a guesstimate at best, in our view, with management having only 65-70% revenue visibility for FY14", leading brokerage Morgan Stanley wrote in a post-results note on Infosys.
Infosys' dependency on discretionary spends is highest amongst its peers (close to 33% of revenues comes from consulting and system integration). Analysts expect discretionary spending to be muted in FY14 and pick up is still some time away. Though Infosys plans to make more investments into high growth areas, these efforts will fructify only in the longer run and are likely to impact margins in the medium term.
The company also stopped giving earnings guidance for the full year - indicating the management's lack of confidence on margins. Margins are likely to be hit on multiple fronts - lower billing rates, lower Lodestone margins, FY13 wage hikes being the key. Given the poor show in March 2013 quarter, most analysts have trimmed their FY14 revenues as well as earnings estimates and remain bearish on the stock.
"We expect about 8-10% consensus EPS cuts for FY14-15 on the Q4 miss. Also, given the recent history of highly-unpredictable results, the stock could drift near-term to an ex-growth Price/Earnings multiple of about 13 times for FY14", believes Abhiram Eleswarapu , IT analyst at BNP Paribas.
