With Infosys due to announce its December quarter results on 11th January, Espirito Santo Securities has revised down its estimates of EPS by 3% and 6% for FY13 and FY14 respectively. The stock is still rated as a buy

In a recent research report released by Espirito Santo Securities (ESS), the brokerage has pegged the Indian information technology (IT) bellwether as a BUY despite factoring in near-term negatives. ESS has cut Infosys’ estimates by 3% and 6% for FY13 and FY14, respectively. The numbers may not seem much, but for a stature like Infosys, it sends negative vibes not just for the company but for the IT industry, as well. One of the chief reasons for the downgrade is “ramp-downs” (i.e. cost cutting) from existing clients and expected economic difficulty in FY14. The ESS reported said, “While Infosys has been winning large deals, it is also witnessing ramp-downs in the existing business which is the key risk to our call.” Infosys will be announcing its third quarterly results on 11 January 2013. The outcome of this is likely to set the tone for the rest of the quarter. However, if ESS prognosis is to be believed, it doesn’t look too good.

For a quite a while, in the last few quarters, the company has disappointed on nearly every front and caused the company to cautionary forecasts in its investor meets. Even though the company has won deals, these are not Infosys’ focus. According to ESS, Infosys has won as many as 10 “large deals” with total contract value (TCV) of over $1.4 billion, with most of these infrastructure-led deals. However, infrastructure isn’t the best place to be, as far as the near-term is concerned as government impasse on infrastructure execution continues and is likely to continue well into the general elections next year. This could put pressure on this vertical. However, to counter this it is reported, according to ESS, that “strong license sales for SAP and Oracle could drive services growth for Infosys”. This is expected to drive sales for the next two quarters.
 

Read previous reports on Infosys here.
 

According to ESS, the company has also been trying to move up the value chain but with no benefits as economic growth continues to be a challenge. This has forced the company to be on the back-foot and revise contract terms and adopt a more flexible approach to pricing in order to retain its existing clientele. According to the report, relative market share in remote infrastructure management (RIM) has increased from 2% to 11% in Q2FY13 and as much as 68% of incremental revenues accrue from this vertical. There could be potential demand as the world increasingly adopts the internet as the de facto standard for communication and management and blur the lines between physical-on-location infrastructure management and doing the same thing online, including virtualization which is a much sought after technology.
 

However, ESS has also mentioned that two of Infosys’s key verticals—BFSI and Telecom—will continue to face pressure. It said, “These verticals may not grow in FY14 as it is facing client specific issues”. As much as 44% of the business arises from these two key verticals. With the way the global economy is headed, things don’t look too rosy for the global financial sector despite several reassuring steps taken by Central Banks and governments world over.

Infosys will now have a leadership problem to ponder over when SD Shibulal retires in March 2015. Why? Because it will be the first time in Infosys history that a non-Infocion will take over the helm. This will make investors cautious at first although Infosys does have a reputed leadership team.
 

ESS has opined that Infosys is worth Rs2,650 per share, which was revised down from Rs2,800. Despite significant headwinds, it has pegged the stock as a BUY from a valuation perspective.