Infy on the mend but revenue volatility to continue in FY14

Over recent years, market pundits have maintained any rise in the benchmark indices will be difficult till the heavyweights return to a growth path. This, possibly, explains why the market scrutinises Infosys ad nauseam.

The company has the second highest weightage on the BSE Sensex at 9.58 per cent but over three years, Infy’s stock has returned only five per cent to investors and its compound annual growth rate (CAGR) return over the same period is a measly 1.65 per cent.

Ever since the company’s growth rate hit an air pocket, its stock price has been penalised heavily. The return of N R Narayana Murthy at the helm has done wonders to the company’s stock, which has risen 20 per cent since April.

Not surprisingly, equity strategists and foreign investors say they would like to see the company return to its former glory in 2014.

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Will Infosys deliver according to the expectation? No doubt, the company’s managed to get its act together in recent times, if new deal wins are any indication but sector-leading revenue growth and margins are a long way off.

Over the past four quarters, Infosys has reported deal wins with a total contract value of $2 billion. Compared to this, HCL Technologies has been reporting deals totalling $1 billion every quarter. In the September quarter, HCL reported nine deals wins worth over $1 billion.

While interacting with analysts as the third quarter draws to a close, Infy’s management has conveyed its revenue growth could remain lumpy in the near term, due to internal reasons and not because of any deterioration in demand.

The company has decided to aggressively enter the deal renewal market and act on its pricing strategy. It has also created five new profit centres to focus on getting deals from new markets. The new year is expected to be good for offshoring, if commentary of most technology companies is anything to go by.

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Even if growth is some way off, the company’s cost optimisation efforts could bear some fruit as soon as the third and fourth quarter of FY14.

Bank of America Merrill Lynch believes the company has adopted a two-pronged strategy to boost profitability. The primary effort is on cutting flab and relocating some support functions from onsite to offshore.

At a strategic level, the company is looking at improving delivery models, using better tools and processes to improve margins. Some brokerages have already re-rated the stock, factoring in an 18 per cent growth in its earnings per share in FY15.

Infosys shares closed at Rs 3,459 on Tuesday but further upside in the near term may be limited from here.