Expect Infy, Satyam full-yr $-guidance to be lower: JPM

With the earnings season round the corner, Bhavin Shah of JP Morgan expects Infosys andSatyam to bring their full year dollar guidance at a lower end. However,  these companies have room to increase their rupee guidance for revenues and EPS both, he adds. Besides, the Street expects the frontline Indian IT companies to post a sequential topline growth ranging between 5.5-9.5% in the second quarter ended September 2008, aided by a sharp depreciation of the rupee against the greenback.   Bhavin Shah says Infosys is likely to report 5% (QoQ) revenue growth in dollar-terms and may see about 100 bps recovery inQ2 margins.             Here is a verbatim transcript of the exclusive interview with Bhavin Shah on CNBC-TV18. Also watch the accompanying video.  Q: Should we be worried about what Infosys has to say on Friday?  A: The September quarter would be fine and in fact we think Infosys and most of the companies would be quite okay in terms of reporting. Infosys should be reporting about 5% QoQ dollar revenue growth and a pretty good 200 bps plus margin recovery. We think it will be on EPS side of Rs 25-50 or significantly above that guidance, thanks to the currency. So, as far as for September quarter reporting its going to be pretty okay.  Q: Do you see Infosys or any of the front line technology lowering or tweaking their full year guidance downwards in this current quarter, even to the lower end of their earlier guided band?  A: What they do with the dollar guidance will be somewhat different with what they do with the rupee guidance and obviously Infosys and Satyam are the two companies that give a full year guidance, so we expect both of them to bring down the full year guidance to the lower end on a dollar basis.  However, if you look at the rupee guidance, these companies have the opportunities to increase the rupee guidance for revenues and EPS both. In fact, Infosys needs to see no growth on rupee basis for next two quarters with their full year guidance based on our estimates and Satyam can see a decline and meet their full year guidance. So effectively it means that both the companies have their room to increase their rupee guidance.  Q: What do you focus on then, because this has been an ongoing debate on whether to look at the dollar numbers or the rupee numbers because the markets sometimes focus on one and sometimes on the other, what’s the right way to look at it in your eyes?  A: The question gets complicated by something that I don’t like the companies to do, which is hedging. I have always believed that Indian companies shouldn’t bother hedging and if they want people to look at numbers that are not swayed by the currency, they can report in terms of constant currency – the way companies such as IBM do. So hedging is probably one reason why the market gets confused by looking at dollar versus the rupee. I personally prefer to look at rupee based numbers because the stock trades on rupees and they trade in India.   So I prefer the rupee based numbers while looking at the valuations. But obviously looking at the dollar is important from the point of view of understanding growth opportunity for all the companies.  Q: Any risk right now that the guidance is actually restated, its not at the lower end of the band but its marked down?  A: I won’t say that risk doesn’t exist, because, globally this is no longer a financial industry problem, it’s a global economy problem. Companies doing day to day business are finding it hard to even renew their line of credit, so it’s a very unusual situation we are in now. As a result, things could take nasty turn in a very short period of time, so I have to admit that I can’t say that no there is no risk of them going below the lower end. Also, the nature of the business tends to be a little bit more sticky and things don’t change that fast. Here, its more of services, the contracts don’t get turned off that fast so I would say the risk is low but its there.  Q: How are you feeling about stock prices themselves, there has been quite a bit of price destruction for the big guys, price wise how do you read Infosys, TCS?  A: We have said they look attractive but they keep getting more attractive. At this point, I would say Infosys, Satyam, are in a high priority followed by maybe TCS. But I think they all have attractive value even on a discounted cash flow basis.  What I mean by that is, for a long period of time we always found that these stocks never looked attractive on DCF basis, the argument was always on PE versus EPS growth. But actually they do look attractive on a long term DCF basis in spite of assuming something close to 15% required cost of equity and rate of return which has a room to go down as the interest rates come down in India over time. So I would say that they are genuinely attractive for anyone who thinks fundamentally about this space and whether you buy it here or whether you buy another 5% or 10% cheaper.  Q: What’s your take on some of the midcap names, NIIT, Rolta etc, they have collapsed completely, forget about any kind of respectable valuations, they are trading at 5-6 PE Multiples, do you think that kind of punishment is justified given the environment or has the market overdone it?  A: The market has overdone for sure and I think you see that in midcap stocks across many sectors and it’s driven by lack of liquidity. When somebody tries to sell a small block in the stocks they go down pretty sharply. So the valuations in the midcap are certainly overshot on the downside but obviously you are not going to see a bounce back in those names before you see some sort of a clear sign in the largecap stocks.  Q: What are your channel-checks showing across the board for these midcap companies because we keep hearing some scary stories of how people in the bench are, you have got no work for two-three months, so relax at home, some salaries apparently haven’t been paid by some midcap companies, has it got that bad for companies with their people on the ground?   A: On a hiring front yes, all companies are taking all sort of measures in delaying new assignments and, there is certainly a quite different environment for hiring, which is actually a bit of a positive for space in the sense that if anything we expect the wages or the starting salaries for graduates, would decline next year. Specific to your story, I haven’t heard anything like that but I can’t roll it out.    Q: One final word on how things turned around for Axon as well, what you have made of a potential tie up with HCL tech? Does it make sense to you?   A: We go back to the interview that we had on Infosys-Axon, I was very clear that I wasn’t convinced about the value in the deal for Infosys. HCL tech bids even higher price and I wont be convinced at all with that. The environment, the world has changed quite a bit in one month. SAP as you might have seen are seeing a pretty sharp change in their business on the down side, that’s bound to have an impact on the package implementation, the link between software to services on one to one. But certainly there is a link so what looked to me like an expensive acquisition at the time of Infosys announcement looks to me a very expensive acquisition now, so that’s my view.