New Delhi: Bhavin Shah of JP Morgan is of the view that Infosys FY08 EPS (Earning per share) guidance is likely to be below Rs 80. He feels that it will be tough for Infosys to offset currency impact and that Infosys Q1 revenues are likely to be in line with the guidance.
Shah told moneycontrol.com that though he does see strong trends in IT services globally, Satyam is in a much better position compared to other tech stocks. The IT major has built in a lower currency in guidance whereas Wipro had least amount of hedging.
Excerpts from CNBC-TV18's exclusive interview with Bhavin Shah:
Q: What exactly do you expect Infosys to report for Q1 next week?
A: It is going to be difficult for them to offset the impact of currency, so we do expect a shortfall compared to our expectations for Infosys. For example, compared to the EPS guidance, they might come in below by about 5-7 per cent in our view. So it is going to be interesting to see how they revise the guidance.
Q: What exactly do you expect to see? In rupee terms and in dollar terms, what do you think they will tell the market about the full year now?
A: They might even be able to revise the dollar guidance up, but the rupee guidance could be revised down, in revenue terms, by at least 1% to 20-22-24% and the EPS guidance by 3 per cent to 17-19 per cent. So the EPS guidance may be below Rs 80 per share now.
Infosys, in the past, is known to have a fair bit of cushioning that they typically keep, so they may find some things to offset the rupee. But the movement is too strong and the impact is too strong for them to find those cushions from conservative accounting.
Q: There has been one brokerage that had suggested they might even fall short of their Q1 guidance. Given how conservative the management is, do you think there is a likelihood and that Rs 80 EPS is priced in to the stock price right now?
A: Falling below the first quarter revenue guidance probably not, but EPS yes, could come in below their first quarter guidance. Is Rs 80 priced in? It somewhat depends on long term rupee movement. Maybe it is not fully priced in, but we feel that at the current levels, the shares do look attractive given that we have only heard good things about demand.
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We have see the other global companies like Accenture, and more importantly we are seeing strong trends in IT services globally, not just outsourcing. There seems to be bit of an acceleration in spending on software. Also, wages have begun to rise at a faster pace even in US. The cost gap is likely to narrow, but not as fast as one might think.
Q: At this point, amongst the big four, Infosys, Wipro, Satyam, TCS, who looks most poised to deal with this foreign exchange fluctuation the best and who might deliver a surprise with earnings?
A: Satyam built in a lower currency in the guidance or some rupee appreciation in the guidance already, so as a result they will have to make a smaller change and also it looks like they will have slightly bigger currency gain as well. So it looks like that Satyam is in a base position.
Wipro probably had the least amount of hedging, so maybe in a slightly more difficult position from those four names. But ultimately, these are temporary factors.
Q: Given that, do you think there could be a case built for long-term derating of this sector, because people may ask why should Infosys trade at more than 24 times at Rs 1,900 if all they are going to deliver is now 18-20 per cent growth in the light of the currency factor? Do they deserve a higher P/E multiple, is that a fair question to ask, about a fundamental derating from that 25-30 P/E multiple, which the sector got earlier?
A: I think, in near-term, that might happen, but we do believe that even if they roll out the guidance, they will still be able to surprise on the upside as long as we do not get another big move on the rupee. The reality is that the company does not want to disappoint on their full year guidance. So they obviously build in a lot of margin of error. And given the trends in IT, we feel that the final number may not be 18-20 per cent, it might still be in the range of 30 per cent.
So short-term, it will be difficult to convince everyone that this company is going to grow faster than other peers. So yes, short-term derating is possible, but we still believe that it is an opportunity. It is already a great opportunity and if it dips further, it would be even better.
Q: Do you think if Infosys quarter is great, but still thinks they can hold the guidance for the full year and they don’t need to lower it, could that trigger off a bounce back in the stock, because it has been oversold for the last many weeks?
A: You are absolutely right. For Infosys to come out and do that would mean that their business is really strong and their visibility is very good. It will be a strong positive signal to the market and will cause a bounce back.
Q: Till last quarter, tactically there seemed to be merit in looking at companies that had higher Europe exposure, but the rupee has appreciated against those currencies as well. Is it now on the same platform regardless of which geographies they function in?
A: Forecasting currency is a very difficult game and clearly not my expertise. But one would put a higher probability of further appreciation on the dollar than Euro. Though, if there is a general trend for stronger rupee against multiple currencies, then your statement is true. I still believe that the dollar exposure is likely to cause a bigger problem.
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