Infosys Disappoints On Guidance

Infosys announced their Q2FY13 results and the stock price touched an intraday low of 9.26 per cent, dragging markets lower on opening. While street expectations lay at a 2.5-3 per cent growth in the topline, results have been in line with expectations. However, what dragged sentiment lower was yet another guidance revision.

In dollar terms, Infosys saw a growth of 2.57 per cent in the topline with revenues touching USD 1.797 billion in Q2FY13 from USD 1.752 billion in Q1FY13. Net profit of the company grew by 3.61 per cent, increasing to USD 431 million in Q2FY13 from USD 416 million in Q1FY13. In rupee terms, the revenue increased to Rs.9,858 crore and the net profit to Rs.2,369 crore.

While Infosys saw their EPS grow by 3.50 per cent to Rs.41.46 in Q2FY13, their total client additions were way lesser at 39 as compared to 51 clients added in Q1FY13, displaying overall weakness. However, 14 of these clients were in the BFSI vertical which comes in as an optimistic point. In the quarter under review, Infosys added 2610 employees. After having delayed raising wages earlier when other IT majors had, Infosys said that it has increased employee wages.

The real concern that the street had was over Infosys’ guidance play. Due to a strengthening of rupee that has picked up momentum lately, Infosys revised its rupee guidance from Rs.40,364 crore (YoY growth of 19.7 per cent) to Rs.39,582 crore (YoY growth of 17.3 per cent). While Infosys has maintained its dollar guidance at 5 per cent, it lowered its constant currency growth from 6 per cent to 5.7 per cent. The EPS guidance for the year has been lowered from Rs.166.46 to Rs.160.61, thus drastically affecting the outlook on Infosys.

What really disappointed the street was the fact that Infosys maintained guidance regardless of its Lodestone acquisition. Infosys later clarified that this would be factored in and adjusted for in Q3FY13.

Also, V.Balakrishnan will be giving up his position as CFO from 31 October 2012 and Rajiv Bansal, the current Vice President of Finance would take over from 01 November 2012. V.Balakrishnan would thereafter be responsible for Infosys BPO, Finacle and the India Business Unit of Infosys.

A shift in management combined with a pessimistic outlook for the near term visible from dynamism in guidance asks for a cautious short run outlook. According to Ms. Ankita Somani from Angel Broking, “Overall the results were subdued with guidance numbers indicating that the environment remains challenging for Infosys. We may further downwardly revise our estimates for FY2013 marginally being cognizant of the effect of guidance and uncertain macros.”

Overall, though the financials of Infosys have been in line with expectations, guidance has dragged the outlook of the company behind. We expect growth to pick up and guidance to improve once the Lodestone acquisition starts adding value thus maintaining our recommendation to accumulate for long term benefits.