Infosys Ltd ADR (INFY) Disappoints Across the Board, Shares Sink

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Infosys Ltd (NYSE:INFY) (NSE:INFY) disappointed on all counts- revenue growth, operating margins missing, FY14 revenue growth guidance and withdrawal of EPS guidance. The earnings results sent shares down over 20%. The company reported 1.4% Q/Q revenue growth in 4QFY13 including Lodestone.

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Furthermore, FY14 revenue growth guidance of 6-10% Y/Y (including Lodestone) is dismal. It is also a very wide range offering no comfort. Analysts expected guidance to be at least 10%. The exit rate itself (4QFY13 quarterly annualized revenues) should provide 4.8% Y/Y revenue growth without any Q/Q increasing in FY14. The guidance implies CQGR of 0.5-2.0% Q/Q for FY14, which is very weak. The dismal quarter again raises the question whether Infosys Ltd ADR (NYSE:INFY) (NSE:INFY)’s turnaround story is credible or not. Interestingly, Infosys has stopped giving EPS guidance. It might imply that the company does not yet have a firm handle on its margin trajectory.

4QFY13 revenues came in at $1,938 mn, implying Q/Q revenue growth of 1.4%, meaningfully below consensus estimates 3.9% Q/Q. JPM estimated Lodestone to contribute 1.3% points (USD 65 mn) to Q/Q revenue growth; hence organic growth is likely to be nominal (0.1-0.3%). Infosys Ltd ADR (NYSE:INFY) (NSE:INFY) missed its FY13 revenue growth guidance of 5% Y/Y meaningfully. Constant-currency growth was at 1.7% Q/Q.

Quick Comment: In FY13, Infosys has consistently missed warning on its quarterly revenue performance. In a pattern of sorts, it has not disappointed when it has warned, and it has not warned when reported revenues are actually below expectations.

Opaque cost outlook: Infosys has discontinued its cost guidance and has not disclosed any details around its FY hiring plan, wage hikes, plans to normalize the cost structure and/or margin outlook for FY14e.

For FY14e, Infosys Ltd ADR (NYSE:INFY) (NSE:INFY) revenue growth is likely to be below industry, as it has guided for 6-10% yoy US$ revenue growth. Analysts are not clear why Infosys has not been able to gauge its cost, hiring or earnings outlook (costs are largely in its control) but has tried to estimate revenues, which are more dependent on the macro and a guesstimate at best, with management having only 65-70% revenue visibility for FY.

With below-industry revenue growth, Infosys’ revenue performance is unlikely to be anything to boast about over the coming quarters. However, the stock could be driven by earnings growth reviving as the cost structure is normalized in FY14e. Analysts believe that with 5-10%yoy US$ revenue growth, its earnings could grow by 15-20%yoy or more as attrition and revenue growth normalize its cost structure and help margins, if management delivers.

‘Infosys Ltd ADR (NYSE:INFY) (NSE:INFY)’s commentary on the weak macro has not been reflected in the comments of peers, such as TCS, Cognizant and HCLT, throughout last year, and the stock will remain an outlier in F14, in our view. We believe that, in their March 2013 results, TCS and HCLT (both rated OW) are unlikely to see similar revenue issues’ says Morgan stanley.

Analysts at Barclays noted the same stating further, ‘we note that Infosys Ltd ADR (NYSE:INFY) (NSE:INFY) commentary remain at odds with TCS, the bellwether of the sector. TCS maintains that FY14 could be a better year than FY13 and has strong confidence in their March quarter performance. Clearly, Infosys’ problems are more company specific and company would need to do a lot of heavy lifting to keep their market share from sliding. The stock could remain volatile in the near term with TCS being one of the key beneficiaries of Infosys’ misfortunes.’



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