Infy may raise annual guidance to 6.5% on back of Lodestone buy

Infosys? acquisition of Swiss consulting firm Lodestone may encourage the IT major to revise its revenue guidance upwards this fiscal, according to analysts tracking the sector.

The Bangalore-based software firm has had a poor run in the past one year and disappointed the markets every time with its forecasts. But the September quarter, traditionally the sector?s most productive phase, can turn the fortunes around for the company.

Analysts are predicting that the IT bellwether will revise its dollar revenue outlook by 150 basis points (bps). ?We estimate the annual guidance for FY13 could be raised by about 1.5 percentage points to 6.5% year-on-year on the back of the recent acquisition of Lodestone,? noted a Barclays report on the Indian software and IT services. ?Lodestone is about 3% of Infosys?s revenues and would have a half-year impact as the financials begin to be integrated from October 2012,? the report stated.

Foggy visibility into client spends led to cutbacks in guidance, with the firm lowering its dollar revenue guidance growth to 5% from 8-10% as projected earlier. Last quarter, Infosys, for the first time, had announced it will not issue a quarterly outlook due to poor short-term visibility.

Early this year, industry body Nasscom predicted a 11-14% growth for the industry in revenue terms, but noted that it will review the same in October if required. Recently, at the analyst briefing hosted by TCS, Infosys indicated that it is on track to meet its full-year guidance of growing faster than Nasscom?s industry estimate.

According to Rajat Rajgarhia, director (research), Motilal Oswal Securities, Infosys is expected to grow its volumes by 3% sequentially.

?To meet its minimum volume growth of 9.5% in FY13, the company requires a volume CQGR of 2.8% over Q2-Q4. We expect Ebitda margin to expand 30 bp quarter-on-quarter to 30.9%,? said Rajgarhia. Brokerage house Sharekhan expects a sequential volume growth of 3.4% compared with 2.7% in Q1.

In its report, Barclays pointed out that an EPS guidance upgrade is unlikely, as the company has noted that the acquisition would only be EPS accretive after the first 18 months.

Sanjeev Hota, of brokerage house Sharekhan, also expect its annual guidance to be revised upward to 6.5%, thanks to the Lodestone deal.

However, Ankita Somani, IT analyst at Angel Broking, feels Infosys will still lag behind rival TCS and HCL Technologies in volume growth. ?We see a 2.5% volume growth during the July-September period,? she said.

In terms of profitability, analysts expect Infosys to post better numbers compared with Q1. Motilal Oswal expects 4.9% increase in profit after tax to R2,400 crore. While Sharekhan predicts a 4% sequential growth in profit.

Infosys, which took a drastic step this year to withhold wage hikes till it gained more clarity on its business, is expected to dole out salary increments later this year, industry experts said. Analysts feel any news of wage hike will be positive for the company as it will indicate strong business momentum.

Among the key factors to watch out for during the quarter, Dipen Shah, head of private client group research, Kotak Securities, pointed out that management commentary on the macro scene and client spending will gain additional importance. ?We will closely track comments on calender year 2012 budget spending patterns. Pricing declines, if any, further insights into any pick up in discretionary spends, hiring trends and comments on new opportunities like cloud computing, etc,? said Shah.

At a recent CLSA?s Investor Forum in Hong Kong, Infosys affirmed a more aggressive and flexible go-to-market strategy in response to changing IT buying behaviour at clients. ?While the changed approach has yielded a few deal wins, near-term performance could remain clouded by continued issues in financial sector, delayed decision making on bigger projects and an unfavourable pricing environment,? noted brokerage house CLSA.

However, some aren?t ruling out the possibility of an unchanged revenue outlook. ?Though there has been no negative developments of late. We don?t see Infosys to revise their dollar revenue forecast for FY13,? Somani said.