Infosys turnaround is still a distant prospect

Zee Research Group

It appears that return of founder Narayana Murthy has brought a good luck as Infosys has surprised the street with its first quarter results (Q1FY14) which has surpassed expectations on both revenue and profit front. Consequently, the stock of Infosys soared 11 per cent on July 12, 2013 (the result day). However, this finding can be termed as an aberration because Infosys’ stock generally tumbles on the result day.

A Zee Research Group (ZRG) analysis has found an interesting fact which reveals that during the last 13 quarters, only three out of 13 times stock has reacted positively on the result day. Out of the sample of 13 quarters, there were only three instances when stock zoomed on the result day. The first instance happened on October 12, 2011 when stock of Infosys climbed 7 per cent after company announced its Q2FY12 results. Similarly, on January 11, 2013 stock galloped 17 per cent after company announced its Q3FY13 results. The latest instance happened on July 12, 2013 when stock shoned 11 per cent after company announced its Q1FY14 results.

Agreeing with the view that for the last three quarters stock volatility has increased a lot on the result day, Apurva Prasad, equity research analyst at ITI Securities who closely tracks IT sector averred, “Stock movements largely depend on the sentiment of the market participants. Market anticipation has been different at all times. The result of Infosys is generally watched by the entire street. For instance, if there is a lot of pessimism and company delivers better than expected results then stock reacts positively and this is what happened today.”

Stock rocked as the overall performance posted by the company in the first quarter of the fiscal 13-14 (Q1FY14) was strong. The dollar revenue grew by 2.73 per cent sequentially which was above street estimates of nearly 1 per cent growth. Furthermore in rupee terms, revenue grew by 7.7 per cent to Rs 11,267 crore on Q-o-Q basis owing to around 9 per cent rupee depreciation witnessed in April-June quarter of the current fiscal. Taking into account the rupee depreciation, company has upgraded its rupee revenue growth guidance for FY14 from 6 -10 per cent to 13 -17 per cent. However, company has kept dollar revenue guidance unchanged despite cross-currency pressure.

Even, EBIT (Earnings before interest and taxes) margins have expanded by a meager 10 basis points to 23.64 per cent on sequential basis as against the expectations of a downtick. The volume growth has improved to 4.1 per cent as against 1.8 per cent in the previous quarter. Profit was down 0.84 per cent to Rs 2374 crore but it was better than the expected figure of Rs 2315 crore.

Reasoning out the good results reported by Infosys, Prasad at ITI Securities, said, “Performance in consulting business and good volume growth on sequential business are the prime two reasons behind the good results. Others reasons were: added more clients in 100 million dollar category and maintaining the dollar revenue guidance.”

Referring to the outlook on the stock, Prasad added, “I acknowledge the positive Q1 results but it is not good enough to make a secular change in terms of outlook as challenges (pricing pressure, high attrition rate) still remain. Currently we have a hold rating on the stock and it will take some more time before we re-rate the stock. Although US immigration bill can impact deal pipeline of IT industry yet the depreciating currency is acting as a savior for it.”