As the second quarter earnings season kicks off with Infosys announcing its September quarter numbers on Friday, the Street expects the IT major to revise its conservative revenue guidance on the upside. However, given the sharp swings in the company’s quarterly volume growth compared to estimates in the past two years, analysts maintain a cautious view on the stock.
After posting better-than-expected sequential sales growth of 2.7% in the quarter ended June 2013, Infosys guided for a broad range of 6-10% y-o-y growth in its dollar revenue for the fiscal year 2013-14. This meant that even if Infosys managed compounded quarterly growth of 1.5% in the subsequent three quarters, it would reach the upper end of its annual guidance.
Based on this rationale, Kotak Institutional Equities expects the company to revise its yearly revenue growth guidance to 9.5%-11% and anticipates a 2.6% q-o-q growth in the dollar revenue of Infosys during the quarter. ?Revision in guidance will likely capture relatively strong 1HFY14 performance,? it added.
While Jefferies also expects an upward revision to fiscal guidance, it notes that the stock movement of Infosys in the last three months reflects the perceived uncertainty in the revenue growth. ?This has been reflected in the share price, up 23% in the past three months (including +11% on the day of Q1 results) compared to an upmove of 35-37% for other Tier-I IT stocks,? it said in a note on Wednesday.
Even as most analysts believe that the average sequential depreciation of 10% in the rupee may benefit Infosys more than other IT giants, there are number of concerns specific to Infosys. The first being, the company’s strategy to move towards low-margin deals and potential loss of deals from existing clients.
Further, a number of exits of the key officials is also perceived as a worry, even as the return of the company’s founder Narayna Murthy to the company in early June 2013 has been widely appreciated.
Notwithstanding the caution around Infosys, the IT sector is seen leading quarterly earnings this season. Analysts are particularity upbeat about increasing visibility on deals from developed markets, especially from the US while the rupee depreciation is being considered the ?icing on the cake?.
While TCS is expected to maintain its lead on strong volume growth, analysts expect HCL Tech and Tech Mahindra to report strong numbers. On the back of robust outlook on TCS earnings, the stock has rallied more than 65% this year and its valuation gap with Infosys has widened. As on Thursday, it traded at 28.2 times its trailing 12-month earnings while Infosys traded at an earning multiple of 18.8.
