Infosys results worse than we expected: Nitin Padmanabhan, Indiabulls Securities

Nitin Padmanabhan, Analyst-IT Services, Indiabulls Securities, in a chat with ET Now talks about Infosys results and the IT pack.

Everyone is saying that the margins are bad, now are the margins really bad? Are they worse than you had expected?

It is worse than what we had expected. We were expecting a 170 basis point decline but it sort of came up to 240 basis point decline on a QoQ basis. But what people really need to look at in this stock is that growth is back in a big way. You have got Infosys hiking the dollar guidance to 21% on the upper end for the full year. If you look at consensus estimates on dollar growth, it is somewhere around 22-23%.

So within the first quarter itself, we have caught up with where consensus is in terms of dollar growth rates. In terms of margins, my sense is when growth is there, Infosys can comfortably manage margins and margin is something, which you can handle at your end. That’s something which Infosys has always managed pretty well.

What happens if the weakness in the Euro persists or gets worse?

I would not be too concerned about the European currency at this point. If you look at - let’s say just the Euro weakening or just the GBP weakening, this quarter after such a sharp fall, you have an impact of probably 1.2% on dollar revenues. But growth is so strong that I do not see that as an issue at this point in time. If you look at the guidance, they have already factored the weaker Euro and GBP. If you were to add that back, the guidance would actually be higher by a percentage point or so.

What about the road ahead?

Officially we have 22% growth rate in dollar terms. We are looking at an EPS of 120. We will have to hike that.

What about your target price on the stock?

3188.

Are you likely to change that?

That too would probably increase a bit.

It seems that they are increasing wages a fair bit but people do not really want to stay on at Infosys. What is your view?

You normally have this the moment you give a salary hike and when the demand is back in such a big way and there are a lot of players who have not really hired during the downturn, you tend to have an increased level of poaching. That basically drives up the demand for mid-level employees. Most of the attrition is on the mid-level and that’s where Infosys has given the highest hikes possibly. So overall, what we think is that attrition from hereon should sort of taper off because the wage increase cycle is over and the attrition should taper off a bit going forward.

Everyone is also talking about how business spending by US companies is reviving in a big way. Now do you think that story could change very quickly if the double dip prognosis for the US economy does come true?

How we look at IT spends is a way to increase your overall efficiencies. Now our thesis is that during a downturn, you basically tend to cut costs very quickly and most of it, you tend to get around the easy way of cutting costs. This is cutting headcount in manufacturing capacities and so on and which is what we saw during the downturn.

Now if you look at the non-farm productivity for the US, you would notice that the amount of cost cuts has been the highest since 1989 and we believe that there is only so much that can be done the easy way. From hereon, you would really need to invest in processes and technology to really improve your productivity and that’s where we think the risk to IT spends actually declining out of the US is actually low.

What is your expectation from TCS and Wipro and do you think that they would perhaps post marginally better numbers? What would be your top pick in the sector now?

I would expect strong volume growth across this sector. Even if you look at Infosys, around 63% of the incremental revenues for the quarter is just from BFSI. TCS has the largest chunk of BFSI and you would see a strong volume growth across the board, across all these companies, not only BFSI but across the verticals.

My top pick at this point if you look at the absolute alpha per se would be HCL Tech from this point on because it has seen serious underperformance over the past couple of weeks and you have a reasonable upside there. We have a price target of 447 on that stock.