The Hindu Business Line : <I>The Infy beacon for the market</I>

While Infosys has come out with an earnings guidance that betters market expectations, a host of industry-wide variables will shape stock market perception over this week.

The management guidance offered by Infosys Technologies in April every year has been a beacon for the stock market. After the turbulent swaying of the market the past week, the guidance should be a sort of lighthouse for investor perception when the bourses open on Monday.

Pitching revenue and earnings 29 per cent and 27 per cent higher respectively for 2006-07, Infosys has set a positive tone to the proceedings. Over the past five years, this is the best guidance offered by the company and is broadly higher than market expectations.

Analysts and industry observers are likely to remain divided over the probable impact of this guidance. Those impressed by the guidance may to seek to quickly re-rate the entire sector. But many others may want to to `wait and watch' till other players, such as Tata Consultancy Services, Wipro and Satyam, make their earnings announcements this week. And in a liquidity driven market, this tug of war between market participants will play out over this week.

While the Infosys management guidance is strong, it has to be viewed through the prism of four key variables:

The demand environment: The Infosys management has indicated that the overall IT spending is likely to remain buoyant and, in particular, the offshoring part of the pie is set to grow further. It also anticipates the pace of discretionary spends on various service offerings to accelerate during the year. Though encouraging, it remains to be seen whether the margin of surprise on the upside will prove to be as strong as expected. In any case, it is clear that a possible upward revision in guidance will be a measured one through the year, unlike the sharp change of revision seen in 2004-05, when both the revenue and earnings guidance were pushed up by 16 percentage points by the first quarter of the year.

The multinational brigade: The multinationals have been seized of the offshoring threat for over a year and are getting their act together. In particular, IBM and Accenture have made substantial progress on this front and if EDS manages to secure a majority stake in MphasiS, this could be the year when the full force of their offshore strategy plays out in a maturing application development and maintenance market. The serious intent is fairly obvious from the fact that IBM's CEO is holding the next investor conference in Bangalore in early June to showcase the Asian growth story.

The value chain: As Infosys progresses up the software value-chain and builds on its substantially higher revenue base of $2 billion, it is likely to face a host of competitive pressures from its domestic frontline peers. HCL Technologies is slowly carving out a niche for itself in the remote infrastructure management space, with a flurry of multi-year deals. Satyam is proving to be a force in enterprise solutions, where it can take on Infosys in practically every deal that matters. And Wipro, through organic and inorganic moves, is enhancing its presence in the R&D and product engineering space. As increasing number of mega deals cornered by the Big Six come up for re-negotiation or are unbundled to the best of breed players, the competition will be far more intense than in the past.

The upside in billing: This could be a closely-watched variable for the next couple of quarters. Despite robust volume growth, Infosys (and other frontline companies) has been able to increase prices only for new clients. For the past six-eight quarters, billing rates from existing clients have remained largely flat. Unless these rates begin to look up, the flexibility and comfort that Infosys derives from its multiple levers of growth, such as employee utilisation, offshore-onsite mix, lower selling, general and administrative costs, and changes in business mix, will be limited.

Krishnan Thiagarajan

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