Infosys can hit 7,000, says expert; is it a better bet than TCS?

 ECONOMICTIMES.COM | 17 Jan, 2014, 01.27PM IST 

Which is a better bet: TCS or Infosys? "Well, the order of preference is always tricky and difficult. TCS has a lot more visibility, whileInfosys has some concerns around organisational issues, and valuation gap is also there." says Gautam Chhaochharia, Head-India Research, UBS.

"Comparing TCS with Infosys, the former is trading at a slightly expensive or higher multiple. However, in a sector like IT, I would prefer consistency rather than volatility in performance, which is why TCS would clearly stand out," says Pankaj Pandey, Head Research, ICICIdirect.com.

"From an overall sectoral perspective, we have a neutral outlook on TCS, because we believe that easy money has already been made in the sector. However, having said that, we would expect these set of numbers from TCS to continue. Therefore, we have a target price of Rs 2,450," he adds.

For Tata Consultancy Services (TCS), all basic business indicators are at a peak. This includes return on equity, operating profit margins and utilisation rate. For Infosys, their business indicators are nowhere close to weak. So, if the economic environment improves some would argue that the rate of change will be more constructive for Infosys and not TCS. How true is this?

"I completely agree with that as if you see the consensus numbers for TCS, dollar revenue CAGR is around 19%, the EBIT margin estimate is around 29% and the target multiples is around 19 times; the only upside risk is revenue growth. Something beyond 19% for TCS in the near term; and if the management can give confidence one can expect something beyond that," says Basudeb Banerjee, Research Analyst, Quant Broking.

"One should not discard TCS just because the numbers are at their all-time highs. TCS has always probability of surprising you positively downside," he adds.

"For Infosys, estimate expectation is somewhere around 13-14%. It is still way behind leaders like TCS and Cognizant. So, the scope of a positive surprise from Infosys is definitely there ... Infosys is a turnaround player in terms of both as a rerating candidate and that its dollar revenue growth is moving up. By this logic, Infosys has much higher upside risk from current levels," says Basudeb Banerjee.

Can Infosys go to 6,000 or even 7,000 levels?

"Surely, why not," says Ravi Dharamshi, CIO, ValueQuest Investment Advisors. "We are very bullish on technology per se, and within that Narayana Murthy is the one that has come in and has spelt out the strategy, the strategy is to get cost under control, perform or perish attitude," Ravi Dharamshi adds.

"Utilisations is low, margins are low, they are not firing on all cylinders. The valuations are still at 15-16 times forward. If you believe that NRN can turn this giant ship around and perform, I believe there has enough money to be made in this large-cap only. We can see the stock double over a three-year period," he says.

Is the upside on TCS restricted?

"Yes, our fair value for TCS is 24 times. The stock is already trading at about 20 times on March 2015 basis. You compare that to something like Infosys, which is slightly below 17 times on say March 15 basis. Wipro is more like 16 times. HCL Tech is even cheaper. So, I suspect what you are seeing here is maybe people taking a slightly more positive call on other tier-1 names at the expense of TCS," says Sanjeev Prasad, Senior Executive Director & Co-Head, Kotak Institutional Equities.

"Having said that, TCS will continue to deliver well into the next two years given that the US economic recovery looks very strong and IT spendings will improve. TCS's execution is absolutely fabulous. So, I see no reason why one should be panicking and selling the stock. It should continue to be a part of the core portfolio," he says.

Will Infosys’s next CEO be an outsider?

S.D. Shibulal is the last of the Infosys founders to helm the IT company. Photo: Aniruddha Chowdhury/Mint
Live Mint :Pankaj Mishra  |  Anirban Sen :Sun, Apr 14 2013. 11 58 PM IST

With hunt for successor to Shibulal beginning, some board members want search to include external candidates 

Bangalore: Infosys Ltd, India’s second biggest software firm, has started the hunt for a chief executive officer (CEO) when the last of its founders, S.D. Shibulal, retires in two years. Some directors on its board want the search to include external candidates because the company’s current management is struggling to regain its past glory.

Jeffrey Sean Lehman, the New York University Shanghai vice-chancellor and chairman of the nominations committee at Infosys’s board, is leading the process, said two people directly familiar with the development. Lehman led the hunt for Infosys’s chairman when the company’s iconic founder N.R. Narayana Murthy retired in August 2011.

Infosys’s 15-member board has nine independent directors, two co-founders and four leaders from the management. Of these, some are of the opinion that Infosys needs to make bolder decisions, especially while selecting the next CEO as part of the company’s biggest management transition.

“The board is duty-bound to look for the best possible candidates, both internally and from outside. Given recent performance, a more thorough hunt that includes candidates from outside too is something high on the agenda,” said one of the people. Both requested anonymity because these are confidential details and nobody is authorized to comment.

Founded in 1981 by Narayana Murthy and six others, including Nandan Nilekani, S. Gopalakrishnan and Shibulal, Infosys was considered the bellwether of India’s $108 billion information technology (IT) sector until three years ago.

In the past two years, the company has missed its revenue and profit growth forecasts several times and has been overtaken by Cognizant Technology Solutions Corp. in annual revenue. It also pursued the new 3.0 strategy doggedly in an environment when outsourcing customers are only looking to save costs.

Last year, Infosys missed the lower end of its revenue forecast at least twice and stopped giving quarterly forecasts. The sluggish growth rates and increasingly impatient investors prompted Infosys to re-examine its strategy and it started cutting prices for select clients. The company also entered into revenue-sharing agreements with companies such as IPsoft Inc. to drive up business volumes, even at the cost of margins.

On his part, Shibulal admitted that the new strategy that aims to generate one-third of total revenue from Big Data solutions, products and platforms may have been ill-timed.

“There’s no doubt that the volatility impacted our revenue, which did not allow us to benefit from 3.0. The strategy is all about creating two other new growth engines. That should be done at any point of time—there’s no good time or bad time for that. We cannot wait for the world to be stable before we say we’re going to create a new growth engine,” Shibulal said in an interview after the company announced its earnings for year ended 31 March, which fell short of the 5% revenue growth prediction.

When asked about his views as a board member on Infosys’s next CEO and the ongoing succession planning, Shibulal said that was being done by the nominations committee.

Experts such as Partha Iyengar, who heads research at Gartner Inc.’s India office, said Infosys’s pessimistic stance at the beginning of the year is a cause for concern and it’s time the board gets aggressive.

“If you’re in a position of strength and you’re making changes, then it’s alright. But when your position is weak, you should not be making drastic changes. They made those changes at a time when they came to the realization that the market doesn’t see them at a premium,” said Iyengar.

“I don’t think the board of Infosys will significantly shake things up now. They should take a long hard look at the company and get back some mid-course sanity,” Iyengar added.

Analysts at brokerage firms, some of which had upgraded Infosys after better-than-expected earnings announced for the December quarter, were shocked to see their own forecasts of a recovery go wrong.

“Infosys’s extremely poor result across top line and margins should take the stock back to its pre-December 2012 report levels. This volatility in Infosys’s financial performance is even worse than a tier II IT company and the Street will rightly punish it with a massive de-rating,” CLSA analysts Nimish Joshi and Arati Mishra wrote in their 12 April note.

While Infosys management blamed macroeconomic uncertainties for providing a weak 6-10% revenue growth forecast for year ending March 2014, experts are not convinced.

“There is a lot of clarity in their key markets, especially in the US. There’s clarity in decision-making on the political front, whether it’s the H1B visa issue or immigration. Infosys’s performance in this quarter isn’t justified by the broader economic conditions,” Iyengar of Gartner said.

The challenge for the Infosys board is to ensure that the company does not become an outlier in an industry where top firms including Tata Consultancy Services Ltd, HCL Technologies Ltd and Cognizant continue to gain market share in the same industry, serving similar customers.

“It’s not just the board; the transition at Infosys is seminal with all founders set to go. The board, especially independent directors who have operated under the shadow of the founders for long, will also get more active,” said the second person familiar with succession planning.

The question is whether Infosys has enough time to trust the strategy being executed by the current management.

“As far as the leadership is concerned, they need someone with a vision. Infosys specifically is at a stage where they need someone like that. This is not the right time for detail-oriented management,” Iyengar said. “So they need someone with a vision, someone who’s not afraid to take risks, and someone with charisma. Infy has been weak on all those counts.”

Why Infosys Q4 results are a major disaster

First Post :Sunainaa Chadha Apr 12, 2013

IT major Infosys today disappointed investors with its subdued revenue growth outlook despite posting a 3.3 percent increase in its consolidated net profit to Rs 2,394 crore for the fourth quarter ended March 31, 2013.

Revenue Guidance miss: For 2012-13, Infosys revenues grew 5.8 percent against a forecast of 6.5 percent growth. Infosys CEO SD Shibul said the miss was on account of slower deal ramp-ups, pricing decline and adverse cross-currency impact.

The company said it expected 2013/14 revenue to grow 6-10 percent, lower than market expectations of a 12 percent guidance, and added that global economic uncertainties remain challenging for the industry. The guidance is particularly bad considering the IT body Nasscom’s projection of 12-14 percent growth for the sector. Also considering that Infosys’ guidance includes contribution from Lodestone, the Zurich-based management consultancy firm it acquired in Sept 2012, this is a huge disappointment. If one excludes Lodestone, forecast will be even lower.

Further, the lower-than-expected FY14 guidance reflects the uncertain macro environment and the pricing pressure which the company is experiencing.

“Infosys is experiencing delays in decision making by clients and also delays in ramp-ups. The lack of stronger revenue growth despite the pressure on realisations which the company is facing in the non-discretionary space, is concerning. We expect the stock to remain under pressure,” said  Dipen Shah, Head of PCG Research, Kotak Securities.

Reuters

“Infosys results are a disaster. FY14 revenue guidance 6-10% growth, shame they didn’t do away with this. I reckon a large part of the adjustment has already happened today itself,” CLSA said in a note.

K.K. Mital, CEO for portfolio management services at Globe Capital, was quoted by Reuters as saying that Infosys’ guidance appears to be a company-specific problem. “Even mid-cap companies are expected to perform better than this.”

NO EPS guidance

Secondly, speculation that Infosys might do away with guidance may not have been completely off the mark, as the company has not given any earnings guidance. This may imply that  the company does not yet have a firm handle on its margin trajectory.

“The company has not even given EPS guidance for the year, and has continued with not giving out quarterly guidance, something it started in 2QFY13. Thus, quality of guidance and extent of “information asymmetry” that the company seeks to address when giving out guidance, has clearly worsened,” brokerage Nirmal Bang said in a report.

According to brokerage JP Morgan, Infosys has disappointed on all counts and the dismal quarter has again raised the question whether Infosys’ turnaround story is credible or not.

“Infosys disappointed on all counts —USD revenue growth, operating margins missing, FY14 revenue growth guidance and withdrawal of EPS guidance”, it said in a note today.

Organic growth guidance missed:

Infosys also missed its organic growth guidance of 5 percent for FY13, as revenues for the full year came in only at 4.2 percent, which excluded its Lodestone buy.  Brokerage IDFC said most of the incremental growth was driven by Lodestone, the Swiss consultancy which Infosys acquired last year.

Consolidated revenues in dollar terms increased to $1938 million, up 1.41 percent, from $1911 million quarter on quarter, including the Lodestone buy. JP Morgan expects Lodestone to contribute 1.3% points to Q/Q growth; which implies Infosys’  revenues must have hardly grown on an organic basis.

Operating margins disappoint too

Even the companies’ operating margins, a key measure of profitability, fell more than estimated at 23.55 percent despite modest increase in utilization, which might imply that pricing cuts might be deeper than expected.

“The operating margin of the company declined by 210bp qoq to 23.6%, which is a historically low level for Infosys. Profit was held up and because of higher other income of Rs 674cr as againstRs 503cr in 3QFY2013. This seems that the company is still not out of woods,” said Ankita Somani, analyst at Angel Broking.

Are the staff leaving the ship?

During the quarter, Infosys added 8,990 (gross) and 1,059 (net) employees taking the total headcount to 1,56,688.

From about 17 percent at the end of December quarter, employee attrition has moved up to 20 percent in the March quarter , where as in the rest of the industry attrition has been stagnant or falling.

“Notably, it is the highest quarterly annualized attrition for Q4 in the ast decade. Though, partially the pick-up might be because of the company-specific issues, it probably also points to increased demand for resources from other well-performing companies,” said JP Morgan.

Even the management commentary remained cautious, despite industry outlook improving. In an analyst call, Infosys CFO  Rajiv Bansal reiterated that “As we go into Q4, challenges remain.”

The management commentary from industry peers will be important to determine whether the pressure faced by Infosys is company-specific or an industry-wide phenomenon.

The only silver lining seems to be the overall recovery in the US and stabilisation in Europe expected in the second half of this year which may help Indian IT as a whole.

Infosys launches cloud solutions

BL : Bangalore : Aug 7 ,2012

Infosys today announced the launch of cloud integration software solutions, Cloud Ecosystem Hub.

This, according to the company, will enable its existing and future clients to adopt, manage and govern cloud computing solutions.

Vishnu Bat, Vice-President and Global Head-Cloud, told Business Line: “Businesses can now accelerate time-to-market of cloud computing related services up to 40 per cent, improve productivity by up to 20 per cent and achieve cost-savings of up to 30 per cent.” Further, this solution will work with private, public cloud and hybrid clouds (which is a combination of private and public clouds). A private cloud is where a company keeps existing IT infrastructure within its premises and uses solutions on a need basis and in a public cloud, the IT infrastructure resides online and is used on a need basis.

According to Bhat, the Infosys cloud solutions come with features such as unified self-service catalogue that enables enterprises to subscribe to business services across multiple environments such as mainframe or Web. It provides a single-window view of the enterprise cloud ecosystem and a single view of fragmented IT environments thereby enabling monitoring of resource usage.

Infosys has collaborated with providers of cloud infrastructure, applications and platforms such as Amazon Web Services, HP, IBM, Microsoft and others. The cloud business is a part of the products and platforms business and in FY 2012 contributed about 6 per cent of Infosys revenues.

venkatesh.ganesh@thehindu.co.in

Infosys to take time to recover

By Sanjeev Sharma Mar 17 2010 , New Delhi


Infosys expects recovery to be a long–drawn affair, as,
 despite the resumption of discussions
 on discretionary projects, clients remain cautious on
tech spending in the near term, according to a Morgan
Stanley report.

According to the report, V Balakrishnan, Infosys chief
 financial officer, in a meeting with Morgan Stanley i
ndicated that

70 to 75 per cent of clients had finalised their budgets
for 2010 and in most cases budgets were flat to up
(with increases of only up to 3 per cent year on year).

“Overall, the pace of decision-making has improved
 and is better than what was seen in 2008.

The management expects banking and financial services to lead growth

in 2010, followed by telecom.

Clients in the retail vertical are relatively slow
adopters of offshore services and are likely to improve
 with a lag, whereas manufacturing clients continue to
struggle and could take longer to recover,” says the report.

It says pricing pressure has dissipated and the pricing outlook
 appears stable. However, Infosys is finding it tough to roll
back the one-year conditional pricing discounts given in 2009.

When contacted, Infosys board member and human resources director,
 Mohandas Pai, declined to comment, saying that the company was
 in the silent period. A Wipro spokesperson also said his company
was in the silent period.

Indian IT companies have been under pressure after clients cut
 IT spending due to the global credit crunch. The IT industry has
 been one of the sectors impacted by the slowdown.

After two quarters of flat growth, the industry is showing
signs of revival; companies announced improved results in the third quarter.

The next critical event will be Infosys guidance on April 13.

The Morgan Stanley report says the business momentum for offshore
 deals has picked up since February. There has been a material
increase in the flow of requests for proposals (RFPs) and client
discussions on deals that were postponed earlier have also resumed.

“However, it is not clear to us whether the guidance will signal
materially higher growth rates. It is unclear if the recent improvement
 in deal discussions, RFP flows, etc, is significant enough for the
 management to guide for materially higher growth rates than
the 13 to 15% year-on-year growth indicated by Nasscom for 2010,”
the report says.

It adds that Infosys could implement another round of wage hikes in April.
“The Infosys management indicated that it had seen instances of irrational
pricing by a few offshore vendors outside of the top three. Infosys believes
 that rising offshore wages could force pricing discipline in the market –
especially for smaller vendors,” it said.

According to an earlier Morgan Stanley report, Infosys management had
indicated that in Europe, growth in tech spending by clients could
range from flattish at the lower end to as much as 7 per cent at the
higher end.

As per the report circulated in the first week of March,
in investor meetings in London, Infosys executive council
 member and head of manufacturing, B G Srinivas, indicated
that the company was witnessing clear signs of improvement
in the demand environment.

The report says that whereas earlier the focus was on cost
 savings, now executives are focused on working and delivering
 on the IT plans rather than just saving costs. This should result
 in improved quality of conversations with clients – leading to a
higher flow of business.

It says that though Infosys is likely to outperform its
 fourth-quarter guidance, the degree of outperformance
may not be as wide as in the third quarter. The euro and
the pound have depreciated by between 2 and 6 per cent against
the dollar over the past few weeks, which is likely to be drag
 on growth. “Overall we continue to believe that even a 15 per
cent dollar revenue growth guidance could lead to a single-digit
 earnings- per- share growth outlook in rupee terms (EPS of approximately Rs114)
 for the next financial year.”

The report notes that Infosys also appears to have resumed print
 advertising for hiring. “We have noticed print ads after a gap of
at least six months. We note that till 2008 such ads were a weekly
feature before they dried up in 2009. Given the increased focus on
 hiring now, we would expect Infosys to further raise its full-year
hiring guidance from 15,000 campus hires to 20,000 in April this year.
The gross addition in 2010 could be between 25,000 and 30,000 employees.”

This (resumption of large- scale hiring) should lead to an across-the-board
 increase in offshore wages for 2010, though the timing of the wage hike will
 be interesting to watch, according to Morgan Stanley.

(With inputs from Bhaskar Hazarika)
Source: Financial Chronicle