Tomorrow is the much awaited Infosys quarterly earnings results – an event that would set the agenda for IT stocks for the coming days or weeks. So what should you expect from the results?
First off, Infosys is unlikely to report the 1.5-2% growth in dollar revenues that it has managed for the last two quarters, and the company has been upfront about it.
In fact, its warning has been so harsh that analysts seem to expect a decline of around half a percentage in its fourth quarter revenue compared to the third quarter number, which itself was considered a weak quarter on account of the holiday season.
But Infosys’ Murthy has a track record of being overly cautious, and finally delivering above expectations.
So, on the revenue front anything that says revenue did not decline sequentially would be a positive for the stock, and is likely to lead to some strength in IT stocks in general.
Secondly, on the profits front, everyone is expecting a decline of around 2-3% due to the fall in revenue. Here too, we believe Infosys is likely to surprise by reporting either a very very marginal decline or no decline at all. The reason? Infosys has been working pretty hard at cutting costs and have been showing substantial marging improvements since Murthy took over three quarters ago.
There is no reason it can’t protect its profit for the fourth quarter either.
Finally, the most important trigger for the stock would be Infosys’ earnings outlook and forecast. The company had, exactly a year ago, guided for a growth of 6-10% for last year. That guidance was raised to 9-10% in October last year, and to 11.5%-12% in January this year. Finally, the company is likely to achieve a growth of 11.5% for FY 2013-14.
So what would be its guidance for 2014-15? Infosys CEO SD Shibulal warned of unforeseen weakness in some of its retail clients when he addressed investors at a conference in the middle of last month.
Unlike the bullish optimism at the beginning of the year, Shibulal said, he was feeling uncertain due to some client specific and company specific problems at India’s third biggest IT exporter. Some of Infosys’ retail clients, he said, were reeling from the heavy discounts handed out over the holiday season, and they are not expected to invest as much in IT as Infosys had expected.
In addition, Infosys has always had a bias towards hi-tech manufacturing, such as providing services to those making computers. And the hi-tech industry, apart from mobile, has been in a long slump due to the emergence of tablets such as the iPad. Add that to the equation, and Shibulal said, growth was very uncertain in the first half of the new financial year as well.
Net net, Shibulal seemed downright depressed.
So what growth is Infosys likely to guide for? The market is looking for a range with 7% at its mid point. For example, it could 6% to 8%, or 5% to 9%. In this respect, the market seems to be dead right and Infosys is indeed likely to forecast a range with 7% at its mid point.
Any deviation from this on either side would move the stock tremendously.
Finally, any updates about the weakness as clients would also have implications for the stock.
Tata Consultancy Services
Another company that would announce its results is Tata Consultancy Services Ltd on Wednesday. Under normal circumstances, the company would have been expected to report at least a 3-3.5% jump in revenue compared to the holiday-hit December quarter. However, TCS took anticipatory bail by briefing analysts three week ago that growth has been weak in the March quarter.
It has guided for constant-currency growth of less than 2.1%. So everyone’s largely expecting the company to report constant currency and dollar growth of around 1.8%.
The company has also warned that its profits would be hit by investments that it needs to make into its fast growing segments. That is expected to hit margins by about 40-50 basis points (half a percentage point). Any deviation from these two would be frowned upon.
In our own opinion, we believe TCS’ growth is likely to disappoint and constant currency growth is likely to be around 1.5% despite the fact that the base is a seasonally weak quarter. TCS has consistently disappointed for the last two quarters and may do so once again. However, it must also be kept in mind that the reason why TCS issued such a disappointing outlook for the fourth quarter was to keep expectations in check and avoid a repeat of the last two quarters, when results announcements were followed by a deep correction in the stock.
However, the Street seems to have not heeded the warning properly, and the stock is actually higher than it was before the warning was issued late last month.