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There's nothing official about it yet but it appears N R Narayana Murthy might put life back into Infosys. Chief Executive Officer D Shibulal painted a relatively more optimistic picture to investors and analysts last week. After its mid-quarter interaction with analysts, it is widely believed Infosys will be able to beat the upper end of its full-year revenue growth guidance (forecast) of 10 per cent. Lagging its peers in terms of growth rates, it could be a candidate for an upgrade if it demonstrates such a possibility in the second quarter. In the first quarter, revenue grew 2.7 per cent ($1.99 billion) sequentially in dollar terms and 3.4 per cent in constant currency. This was well ahead of analysts' estimates. Now, the market is factoring in double-digit revenue growth for the full year.
After interacting with the management, analysts are convinced the recovery in the US and pick-up in discretionary spends will help the company beat the guidance. For starters, Shibulal has conveyed there is traction in the financial services side, as well as infrastructure management services. Amid volatility and risks everywhere, the management sees growth in its key market, the US. According to Edelweiss Securities, not only is the demand environment improving, the traction in financial services is led by pent-up demand. This is driving the confidence that the company could beat the upper end of its growth guidance (10 per cent). Discretionary spending, too, is showing a pick-up, but neither the company nor analysts are willing to call this a secular trend yet.
With the environment improving, the Street expects the operating metrics to improve. Its utilisation levels have been lower than peers, on poor deal flow and poor execution. This, too, would change once the company starts winning deals. In the first quarter, utilisation improved 290 basis points to 74.3 per cent. If deal traction happens, then this could improve to 78-80 per cent.
There is every chance of this happening, as the company has conveyed the deal pipeline is looking good and it is working on improving execution. New deals are critical, as it brings revenue visibility. Deals worth $2 billion signed last year are helping the company this year. Analysts believe if the company has to grow revenue by 15 per cent next year, the total contract value (TCV) of new deals should be $2.7 billion in FY14. Infosys has announced TCV of $600 million in Q1FY14. Kotak Institutional Equities believes margins for Infosys can start increasing from the second half of this financial year, as cost rationalisation measures would start reflecting. "Our assumption of 90 basis points margin increase to 27.1 per cent in FY2015 has potential for upward revision," the brokerage adds.
