But Infosys guidance dampens sentiment on all tech stocks
On March 13, shares of IT companies fell after Infosys gave guidance for lower revenue in the January-March quarter. This led to the BSE IT index falling for two consecutive sessions as did other stocks in the sector such as Tata Consultancy Services, Wipro, HCL Technologies and Tech Mahindra. The BSE IT index fell 415.33 points or 4.43 per cent on the last two days of the last week.In the last two days, Wipro lost Rs 14.79 or 2.61 per cent to Rs 547.05 apiece,
TCS fell Rs 36.53 or 1.72 per cent to Rs 2141.15 apiece, Tech Mahindra wiped off Rs 18.25 or 1.01 per cent to Rs 1,784. HCL Technologies fell by Rs 43.45 or 2.98 per cent to Rs 1,415.50 apiece.
Infosys was the biggest loser in the IT pack. The company’s shares lost Rs 281.45 or 7.67 per cent to Rs 3,389.45 apiece. The shares had lost 8.54 per cent on Thursday before recovering some lost ground on Friday.
The fear is that the problem highlighted by Infosys is applicable to the IT sector as a whole and may not be a company-specific issue. Is the Infosys guidance a reality check on the IT sector as a whole? Has putting money in the IT sector, where stocks are considered `defensives’, become risky? Or is this just a one-off from Infosys?
“We believe that if the challenges outplay positives, the company is likely to gravitate towards lower end of FY14 guidance, implying muted Q4FY14,” said Prabhudas Lilladher, in a note to clients.
Dhananjay Sinha of Emkay Global is positive on IT. “I think the export-led growth sector in technology and high R&D sector will continue to perform well. Domestic sectors will continue to see challenges. In the financial services space, the expected corporate balance sheet de-leveraging will imply weak credit growth for the banking sector and higher business for investment banking-oriented financial services companies. IT and pharma should continue to perform well,” he said.
Despite the downward guidance, analysts are also recommending a `buy’ on Infosys.
“As Infosys continues to execute on initiatives like cost optimization, sales effectiveness and delivery efficiency, we see growth improving to around 13 per cent and EBIT (earnings before interest and tax) margins at the lower end of the guided range of around 25 per cent in FY16F. We maintain our `buy’ on Infosys, but prefer HCL Technologies and TCS,” said Nomura, in a note.
“I continue to remain positive on the outlook for export-oriented sectors particularly IT and pharma,” said Dinesh Thakkar, CMD of Angel Broking.
Going by the Infosys guidance, it would be the weakest among Tier-1 IT stocks, according to Nomura.
Infosys expects to be at the lower end of its FY14F guidance of 11.5-12 per cent US dollar revenue growth, which implies a 0.4 per cent q-o-q fall in 4QFY14F. Infosys attributes the revenue weakness to: 1) retail/CPG (consumer packaged goods) and Hitech segments; 2) skill mismatches leading to delay in ramp-ups and 3) project cancellations/rampdowns.
In retail segment specifically, Infosys has indicated that clients in its retail segment have re-prioritised their budgets owing to: 1) aggressive promotions and discounting during the holiday season, which has put pressure on spending; 2) retailers cutting their growth forecasts following the weak holiday season and slowing emerging market growth; and 3) weather-related disruptions in the US. Some of these reasons will be applicable even during FY15F, possibly in the first half, according to the company.
“These factors are likely to continue to impact growth in 1HFY15F, according to the management. At around 10 per cent y-o-y US dollar revenue growth in FY15F, Infosys would be weakest among Tier 1 IT stocks, on our estimates,” Nomura analysts said.
Some of the problems cited by Infosys are impacting the IT sector as a whole.
For instance, the company said sales were weak on the severe winter in the US, weak profits on heavy holiday-season discounts and soft outlook on growth in emerging markets impacting retail and CPG. These reasons are general in nature and applicable for other IT companies as well.
According to Motilal Oswal Financial Services, revenue growth will have a significant bearing on the margin’s performance and if Infosys growth falls
well below peers over a sustained period, it will drive elevated investment by the company, thereby dragging margins.
BNP Paribas expects IT services sector to be boosted on global demand recovery and potential rupee weakening, even if the Third Front forms the next government.
There is also a feeling that Infosys may have guided too harshly so that investors are not in for rude shock when it announces the actual Q4 numbers next month. Infosys had similarly guided for a weak quarter in 3QFY13, owing to deals momentum and ramp-ups slowing down. But it ended up significantly outperforming the weak outlook; on the back of productivity improvements and managing to get some of the work classified as critical, which got carried out even during the furloughs. Furloughs are only a 3Q phenomenon so will not recur,” says Motilal Oswal in a note. A furlough is a temporary leave of some employees due to special needs of a company, which may be due to economic conditions at the specific employer or in the economy as a whole.
Dipen Shah, head of the private client group at Kotak Securities, reckons the IT sector will continue to do well because of improving economic prospects in the US as well as signs of stability in Europe.
DK Aggarwal of SMC Investments terms IT as all-time favourite sector along with healthcare and continues to be bullish on this sector despite stretched valuations.
As US and Europe emerge out of the economic downturn, the IT sector can look for more business from these two geographies. The US Fed reserve is slowly withdrawing its stimulus programme on signs of improvement in the economy.
If the US macro indeed improves, the Indian IT sector can look forward for more contracts from the region, which is the biggest revenue generator for Indian IT companies. What needs to be seen is if the problems faced by Infosys are affecting other big Indian IT firms too. We will know the answer in the upcoming Q4 results season.
As far as other companies are concerned, Nomura pointed out that Cognizant did not provide any update on the demand environment and indicated that it will be able to better gauge the quality of the spending environment only after it sees the extent clients allocate spending from March onwards.
TCS indicated that 1H would be better than 2H in FY15 as well and reiterated its earlier stance that it would see better growth in FY15 vs FY14 and exceed Nasscom industry growth projections of 13-15 per cent.
HCL Technologies is not indicating any vertical specific weakness, except in telecom (which it has already communicated) and continues to see healthy demand both in IMS (information management system) and core software.
On March 13, shares of IT companies fell after Infosys gave guidance for lower revenue in the January-March quarter. This led to the BSE IT index falling for two consecutive sessions as did other stocks in the sector such as Tata Consultancy Services, Wipro, HCL Technologies and Tech Mahindra. The BSE IT index fell 415.33 points or 4.43 per cent on the last two days of the last week.In the last two days, Wipro lost Rs 14.79 or 2.61 per cent to Rs 547.05 apiece,
TCS fell Rs 36.53 or 1.72 per cent to Rs 2141.15 apiece, Tech Mahindra wiped off Rs 18.25 or 1.01 per cent to Rs 1,784. HCL Technologies fell by Rs 43.45 or 2.98 per cent to Rs 1,415.50 apiece.
Infosys was the biggest loser in the IT pack. The company’s shares lost Rs 281.45 or 7.67 per cent to Rs 3,389.45 apiece. The shares had lost 8.54 per cent on Thursday before recovering some lost ground on Friday.
The fear is that the problem highlighted by Infosys is applicable to the IT sector as a whole and may not be a company-specific issue. Is the Infosys guidance a reality check on the IT sector as a whole? Has putting money in the IT sector, where stocks are considered `defensives’, become risky? Or is this just a one-off from Infosys?
“We believe that if the challenges outplay positives, the company is likely to gravitate towards lower end of FY14 guidance, implying muted Q4FY14,” said Prabhudas Lilladher, in a note to clients.
Dhananjay Sinha of Emkay Global is positive on IT. “I think the export-led growth sector in technology and high R&D sector will continue to perform well. Domestic sectors will continue to see challenges. In the financial services space, the expected corporate balance sheet de-leveraging will imply weak credit growth for the banking sector and higher business for investment banking-oriented financial services companies. IT and pharma should continue to perform well,” he said.
Despite the downward guidance, analysts are also recommending a `buy’ on Infosys.
“As Infosys continues to execute on initiatives like cost optimization, sales effectiveness and delivery efficiency, we see growth improving to around 13 per cent and EBIT (earnings before interest and tax) margins at the lower end of the guided range of around 25 per cent in FY16F. We maintain our `buy’ on Infosys, but prefer HCL Technologies and TCS,” said Nomura, in a note.
“I continue to remain positive on the outlook for export-oriented sectors particularly IT and pharma,” said Dinesh Thakkar, CMD of Angel Broking.
Going by the Infosys guidance, it would be the weakest among Tier-1 IT stocks, according to Nomura.
Infosys expects to be at the lower end of its FY14F guidance of 11.5-12 per cent US dollar revenue growth, which implies a 0.4 per cent q-o-q fall in 4QFY14F. Infosys attributes the revenue weakness to: 1) retail/CPG (consumer packaged goods) and Hitech segments; 2) skill mismatches leading to delay in ramp-ups and 3) project cancellations/rampdowns.
In retail segment specifically, Infosys has indicated that clients in its retail segment have re-prioritised their budgets owing to: 1) aggressive promotions and discounting during the holiday season, which has put pressure on spending; 2) retailers cutting their growth forecasts following the weak holiday season and slowing emerging market growth; and 3) weather-related disruptions in the US. Some of these reasons will be applicable even during FY15F, possibly in the first half, according to the company.
“These factors are likely to continue to impact growth in 1HFY15F, according to the management. At around 10 per cent y-o-y US dollar revenue growth in FY15F, Infosys would be weakest among Tier 1 IT stocks, on our estimates,” Nomura analysts said.
Some of the problems cited by Infosys are impacting the IT sector as a whole.
For instance, the company said sales were weak on the severe winter in the US, weak profits on heavy holiday-season discounts and soft outlook on growth in emerging markets impacting retail and CPG. These reasons are general in nature and applicable for other IT companies as well.
According to Motilal Oswal Financial Services, revenue growth will have a significant bearing on the margin’s performance and if Infosys growth falls
well below peers over a sustained period, it will drive elevated investment by the company, thereby dragging margins.
BNP Paribas expects IT services sector to be boosted on global demand recovery and potential rupee weakening, even if the Third Front forms the next government.
There is also a feeling that Infosys may have guided too harshly so that investors are not in for rude shock when it announces the actual Q4 numbers next month. Infosys had similarly guided for a weak quarter in 3QFY13, owing to deals momentum and ramp-ups slowing down. But it ended up significantly outperforming the weak outlook; on the back of productivity improvements and managing to get some of the work classified as critical, which got carried out even during the furloughs. Furloughs are only a 3Q phenomenon so will not recur,” says Motilal Oswal in a note. A furlough is a temporary leave of some employees due to special needs of a company, which may be due to economic conditions at the specific employer or in the economy as a whole.
Dipen Shah, head of the private client group at Kotak Securities, reckons the IT sector will continue to do well because of improving economic prospects in the US as well as signs of stability in Europe.
DK Aggarwal of SMC Investments terms IT as all-time favourite sector along with healthcare and continues to be bullish on this sector despite stretched valuations.
As US and Europe emerge out of the economic downturn, the IT sector can look for more business from these two geographies. The US Fed reserve is slowly withdrawing its stimulus programme on signs of improvement in the economy.
If the US macro indeed improves, the Indian IT sector can look forward for more contracts from the region, which is the biggest revenue generator for Indian IT companies. What needs to be seen is if the problems faced by Infosys are affecting other big Indian IT firms too. We will know the answer in the upcoming Q4 results season.
As far as other companies are concerned, Nomura pointed out that Cognizant did not provide any update on the demand environment and indicated that it will be able to better gauge the quality of the spending environment only after it sees the extent clients allocate spending from March onwards.
TCS indicated that 1H would be better than 2H in FY15 as well and reiterated its earlier stance that it would see better growth in FY15 vs FY14 and exceed Nasscom industry growth projections of 13-15 per cent.
HCL Technologies is not indicating any vertical specific weakness, except in telecom (which it has already communicated) and continues to see healthy demand both in IMS (information management system) and core software.