Infosys gains highest since 1997 as Dec earnings beat estimates
“While the unchanged fiscal guidance surprised the Street, even the topline growth for the quarter beat muted expectations that were based on the company's tone about a month back before it went into silent mode,” said an analyst tracking the company.
India's second biggest IT provider clocked in a sequential growth of 4.2% in its organic revenue compared to analyst expectations that topped at about 2%.
The company reported a q-o-q dollar revenue growth of 6.3% to $1.9 billion, including that from the Landsotne acquisition. It also reported an Ebit margin erosion of 66 bps due to offshore wage hikes and shutdowns compared to Street expectations that averaged to a decline of 85 bps.
Contrary to the Street expectations, Infosys maintained its FY13 organic dollar revenue growth guidance of 5% y-o-y and guided for $7.45-billion revenues in the period, including Lodestone revenues of $104 million, indicating a 6.5% y-o-y increase. This also implies a 2.8% sequential growth in the quarter ending March 2013. Experts were largely anticipating the company to reduce its 2012-13 guidance as low as 3.3% y-o-y growth.
According to Barclays Capital, Infosys has signalled a turn in the trajectory of revenue growth as the company has been showing more aggression on winning near deals. It believes that this revival “will have a meaningful impact on the exit velocity of the company in FY14”.
Analysts were also enthused with the management's confidence on “a strong pipeline of large deals”. Even as the company added 53 clients in three months to December, it won eight large outsourcing deals, amounting to $731 millions during the period. They interpret the deal announcements of the last two quarters as an improvement in the IT giant's efforts to manage its business model.
Infosys' struggle to meet its quarterly revenue guidance and slow deal ramp-up — even as competitor TCS pulled of strong performance — weighed on its stock performance, especially in 2012. While it underperformed TCS in eight out of the last 11 quarters in terms of stock returns, its valuation gap with the latter also expanded steadily in the last three quarters.
As of Thursday, Infosys was trading at 13.5 times its 2013-14 earnings, while TCS was valued at 16.4 times its expected net income in the period.
After Friday's outstanding rally, this valuation gap narrowed significantly; the forward price-to-earnings multiples of Infosys and TCS now stand at 15.7 and 17, in that order. However, experts say it may take more than one quarter of stellar performance for this gap to bridge.
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