Q3FY12 Infosys net exceeds expectations, guidance disappoints, having said that…..

Infosys kickstarts the Q3FY12 earnings. Expectedly (thanks to the rupee depreciation) the numbers exceeded street expectation and the Q3 net was up 25% at Rs 2372 crores and lets not forget that this is a QoQ growth for a company the size of Infosys. What disappointed however was their guidance for the next quarter.In the US dollar terms, fiscal year revenue is expected to grow 16.4% from a year ago at USD 7.029-7.033 billion, Infosys had earlier guided for a revenue growth of 17.1-19.1% to USD 7.08-7.20 billion, they raised EPS [earnings per share] guidance for the fiscal to Rs 147.13 versus Rs 143.02-145.26 earlier, but that was too below analysts’ expectations of around Rs 150.

That was where the cookie crumbled and the stock ended down a whopping 8.43% at Rs2588/- shaving almost 38 points of the Nifty. The result, as always were discussed ad nauseam. My take away from all that I heard and read:

Management Speak: The management indicated a couple of interesting things – when asked why they had guided lower they said not surprisingly that the environment was very uncertain. There is no definitive answer to the Euro zone crisis at this point. Client confidence is down. Budgets are getting closed, the early indication is that we will be flat with marginal down. Spending is going to be choppy. That is the reason for a flat guidance for Q4. Between now and April the company will conduct a client survey, budgets will get closed and a spending pattern will emerge. They said customers’ budget is not important it is their share of offshoring within the budget that is the most critical data point. And if you look at Europe, Europe is not a big outsourcer like US. The level of offshoring in Europe is still much lower and that economy is going through troubled times now than the US. So the level of offshoring in Europe could increase. Two large USD 500 million deals were signed this quarter, one of it is from Europe.

My Take: A couple of things. Firstly, Infosys seems to hold to its EBIT margins of 30% which is huge, but the question is, is it time to change strategy shift gears and to grow more but at lower margins like a Cognizant? Perhaps there will be thinking along these lines going ahead….

Secondly, in the last couple of weeks the data and sound bytes coming from the US have been quite positive. The kind of sentiment the Infosys management voiced seems to be at a disconnect. Does it mean therefore that the US recovery is something that we are anticipating too soon? TCS should announce its numbers and while they don’t give a guidance there take on the environment will be worth listening to….

The sector and Infosys enjoy premium valuation how long will that continue? Without doubt IT as a business is getting commoditised but the EBIT margins and net profit growth, that too in this tough environment would suggest that we should not be in a hurry to remove the premium tag.

Having said that: This is ofcourse every analysts favorite phrase ‘having said that’ so here goes… the correction on the stock on the day of results is a reflection of the deep disappointment over the guidance and justifiably so but having said that I feel that the stock is now looking like a good buy. Watch markets and the stock and sometime during the course of the next couple of days look to buy – there is about Rs 150 to be made from this level – the stock should go back to Rs2700 levels fairly soon.

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