FE Editorial : Infy back on track

Written by The Financial Express | Updated: Jan 12 2013, 06:10am hrs
It should be a boost to the managements confidence as much as it was for the Infosys stock that the IT heavyweight was able to beat the Streets expectations for the December 2012 quarter. To be sure, analysts werent expecting too much given how disappointing the companys performance has been in recent quarters; for some time now, there has been a nagging suspicion that the management didnt really have the edge to compete with rivals in tough times. But it is to Infosys credit that it managed to convince the Street that it has got a better grip on the business and that this will show up in the numbers from now on; with the stock rallying a remarkable 17% on Friday, the valuation gap between Infy and peer TCS narrowed significantly. While on Thursday Infoys was trading cheaper than TCS by a multiple of between 3 and 3.5 times estimated FY14 earnings, things changed in the matter of one trading sessionafter estimates of Infosys earnings were upped to around R178 per share, the stock was trading at around 15 times, cheaper by just a multiple of two times than TCS. This kind of movement would suggest the market believes this is a sustainable turnaround, and not a flash in the pan, despite CEO Shibulal pointing out that Infosys was dependent on discretionary spends in a challenging environment and also that IT budgets this year could stay flat or even fall marginally. Some of the confidence would have come from the better pricing that Infosys services fetched in the December, 2012 quarterup 1.8% sequentiallywhich suggested there was a slight swing towards the higher end of the business. As also the fact that the firm didnt trim its revenue guidance for FY13after the September, 2012 quarter, for instance, Infosys had lowered the per share revenue guidance (in constant currency terms) and the earnings guidance for FY13 to $2.97 from $3.03, an indication it hadnt read the market conditions too well.

Analysts must also be happy that the tech major continues to add clients at a fairly brisk pace53 in the three months to Decemberand that the run rate hasnt really dropped at all over recent quarters. The clincher would have to be the eight large deals that it won for $731 million, some of them from Europe. The challenge for the management, of course, is to keep up the momentum and makes sure it gets its fair share of the outsourcing piethe management has highlighted that the mere closure of budgets would not necessarily mean the spends would take place. Competitors like a TCS or Accenture have shown they can cope far better in difficult times, so Infy too must show it can.