Infosys: Disappointing messaging + Bad quarter = worst fears coming true; however, stock action may be overdone :: JPMorgan

 Disappointing messaging + Bad quarter = worst fears coming true. This is
how we would describe 4QFY13 print and its aftermath. Infosys’s bad 4QFY13
print delayed our hopes that it is managing to put its struggles behind it amidst
an improving demand environment. What we find particularly surprising is
management’s messaging to the markets stoking added worry among investors.
 Disappointing messaging by management worries investors, not just
4QFY13 financial performance. We think Infosys would have been better off
not giving FY13 guidance than give one which lends itself to the worst possible
interpretations. By giving revenue guidance so wide (6-10% USD revenue
growth for FY14) so as to render it meaningless and by refusing to spell out a
floor for FY14 margins and, particularly, by stating that it cannot predict
margins in the near term for its business, management has played to the street’s
worst fears. In our view, the better course of action would have been to spell out
a margin band, so that the street gets some assurance that the company is able
and willing to quantify the variables impacting its margins. Better messaging
would have not caused such stock price disruption, in our view.
 We continue to believe that the demand environment is improving & is in
better shape than 6 months ago. We think issues are still largely Infosysspecific.
This may be evident when peers (Infosys/Cognizant/HCLT) report.
 But there is still hope for Infosys which is why we are still OW on the stock.
If discretionary spending comes back (as we expect), we think Infosys should
be able to capitalize on this revival (nearly a third of its revenues come from
discretionary-oriented offerings). This offsets the likely deterioration in margins
that stems from aggressively priced contracts in outsourcing ramping up. Also,
we are now seeing the price action of contracts discounted, volume growth
should follow later (or pricing likely precedes volume pick-up for re-negotiated
contracts/engagements). Utilization is still a buffer. Pipeline is good. We think
Infosys could be overly conservative in its lower-end of the revenue guidance
band (if Infosys manages the same CQGR revenue growth in FY14 as in FY13,
it should end up closer to the upper-end of its revenue band guidance). Maybe, a
case of once-bitten, twice-shy on guidance. We forecast USD FY14 revenue
growth at near the upper-end of guidance band though FY14E Rs EPS is flattish.
 Investment view. Still stay OW. After the disappointing print, the stock
corrected 20%+ while our FY14/15 estimates go down 7-8%. Stock trades at
~14xFY14. We think confidence will return with volume growth in the course
of the year. Timing the Infosys recovery has become tricky but we take a 9-12
month view. We see 15%+ stock potential upside over this time-frame.

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