IT bellwether, Infosys, recently announced its Q3 FY12 results. At Rs 41.50, the EPS for Q3 FY12 not only exceeded the company’s own

estimate of Rs 39.20, but was also ahead of street estimates. However, despite the better-than-expected performance of the company, the scrip witnessed a sharp decline on the bourses. The reason behind the sharp fall was the disappointing guidance provided by

the company for Q4 FY12. 

The worrisome factor was Infosys’ commentary, which clearly indicated deterioration in the business environment going forward. Citing reasons like a slower budget closure process, cautious clients especially in the European region, a delay in project ramp-ups

and choppy spending by clients, the company reduced its dollar revenue growth forecast for FY12 to 16.4 per cent as compared to the 17.1-19.1 per cent growth it mentioned during Q2 FY12. The scrip itself witnessed a sharp correction owing to the weak guidance about the next quarter. 

The guidance provided by Infosys is always looked at very keenly, as it tends to sets the tone for the markets going ahead and also throws light on the state of the actual global scenario.

The moot question is what should be done now. Investors are in a dilemma about whether they should avoid buying the scrip due to the weaker guidance or whether it a good buy at the current levels, at comparatively lower valuations vis-à-vis TCS. We, at DSIJ, hold

with the latter set. It is true that the guidance provided by Infosys raises many negative points, especially since not all IT majors have provided such a worrisome picture. However, along with the negatives, there are many positive indications too. 

The prime factor is the quality of growth. Infosys’ EBITDA margins have been better than those of TCS, which is the largest software exporter, and the gap between the two has widened over the past three quarters. 

Pricing power is another important aspect for IT companies in the current scenario. In case of Infosys, the change in business mix and a marginal uptick in the pricing for new contracts has helped it deliver superior pricing overall. In fact, this is the sixth consecutive quarter in which the company has seen a constant currency pricing increase. This, coupled with the management’s expectation of a stable pricing scenario in FY13, reinforces our view that the company’s pricing is not likely to be impacted significantly during this downturn.

At 49 client additions for the company in the quarter, it is the highest in the past 14 quarters, better than that of its peers like TCS (40) and Wipro (39). In addition, there are other positive indications like the five large deals that it has secured, strong growth of around 17 per cent QoQ in Europe and good traction in the non-top five accounts, which indicates good growth of the company’s average ahead. This indicates that the restructuring efforts by the company have started yielding results. 

One concern is the lower utilisation of resources, including trainees, at 69.9 per cent. However, we believe that lower utilisation leaves greater room for a positive outcome, as the company could utilise its bench strength for addressing any unforeseen growth opportunities. We are hopeful on the demand front, as there has been no actual impact on demand. Clients have budgets in place, and are only cautious about their spending. With the scenario improving in the US and somewhat so in Europe, some demand may surface in the first half of FY13. 

It must be noted that Infosys has always been conservative in terms of providing guidance, with improvements in the same if opportunities arrive later. The management has showed its strength in the past, and is bound to steer the company through the current difficult scenario too. 

On the valuations front too, the scrip is placed well against its peers. At a CMP of Rs 2580, it discounts its FY12E earnings by 17.50x (EPS Rs 147). This is much lower than the ratio of 22x of TCS and 19x of Wipro. Hence, we recommend that investors buy the scrip at the current levels from a long-term perspective.