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IT budget visibility issue for entire sector: Cowen & Co
January, 13th 2012

IT giant, Infosys reported a 33.3% rise in profit for the December quarter; however it cut its US dollar revenue guidance for the full year . Its fourth quarter forecast was also flattish given the global economic turmoil and debt crisis is the euro zone.

Moshe Katri, managing director, Cowen & Co expects to see budget delays probably by four to six weeks for IT companies. In an interview to CNBC-TV18, Katri said, "I don't know if this is conservatism or if this is just a function of the fact that companies still don't have decent visibility into the budget cycle and into calendar year 2012 budgets."
He feels that visibility in budget is an issue for the entire IT sector. "We don't think this is an Infy specific issue only," he added.

IT stocks are expected to be range bound until there is better visibility in budgets. "We are probably going to get that visibility in four to six weeks from now," he added.
Below is the edited transcript of Katri's interview with Udayan Mukherjee and Sonia Shenoy of CNBC-TV18. Also watch the accompanying video.

Q: The dollar guidance for the fourth quarter and the scale back in the dollar guidance for the full year. How should investors read that?

A: The biggest issue here in our view is that it wasn't about the December quarter; it is more about the March quarterly guidance and the fiscal year guidance. A lot of it has to do with where we are on the budget cycle itself. We are going to go through budget delays probably by four to six weeks. When you don't have a budget in place on time, you will not have funding for projects to start at the beginning of the calendar year. That is somewhat is kind of reflected in the guidance.
I was looking through my numbers when the last time Infosys had such a I would say unimpressive sequential growth for March quarter, it was probably in March of 2009, this is when we were just getting out of the last downturn. So I don't know if this is conservatism or if this is just a function of the fact that companies still don't have decent visibility into the budget cycle and into calendar year 2012 budgets.

What we need to see now is street number for the March quarter to come down. We don't think this is an Infy specific issue only. Visibility would be an issue given the macro uncertainty. But the way we see it beyond the March quarter, we still think that we are going to see growth for December straight.

Q: Given the kind of muted Q4 guidance that they have given out how are you positioned in the stock now? Do you think the stock would be range bound or do you think that there would be pressure because of uncertainty of what the next year may throw up?

A: I would say the group as a whole is probably going to be range bound until we get better visibility in budgets. We are probably going to get that visibility four to in six weeks from now, we will be in a pretty decent shape. This is how the year kind of panned out during our calendar year 2009.
Q: Do you expect Infosys to come out in April now once hopefully when the budgets have been frozen and give out solid guidance for FY13 or would you say that the tepid fourth quarter guidance is indication that we might have a sluggish kind of year to look forward to?

A: It is too early to say. Infosys has a couple of things that it still has to deal with strategically, but before that and kind of in respect to what you just said about why the stock is down, we really need to dig deeper into the actual revenue metrics that they have reported. North America was up 1% sequentially, that's down from 6% over the quarter ago. Consulting NSI decelerated significantly from the quarter before and products were up 18% sequentially and I am assuming this is what helped them meet the quarter at least in US dollar terms.

So, the quality of the numbers wasn't that great. We have also continued to see some issues with their top-10 or top-100 legacy customer base because they were down sequentially. In terms of what happened in April, in our view Infosys has a dilemma. Historically, this is a company which believes in maintaining record high EBIT margins and try to operate business to business and try to post top-line growth. They tried to post top-line growth that would have been kind of in line with their peers.

During past few years it seemed that that strategy seems to be backfiring and the question here is what happens next? Will they continue to maintain that record EBIT margin level? In a way that will continue to hurt their top-line growth although tried to kind of change strategy. We always like to contrast Infosys with Cognizant where their EBIT margins continues to be in the 17-18% level, but on the other hand they were able to grow 1.5 times compared to their peers. People like that kind of strategy in terms of long-term growth strategy and that really kind of is the main issue. We have Infosys posting maybe 11-12% top-line growth for fiscal year 2013, clearly below their peers and in our view a lot of it has to do with that strategy that we just mentioned.

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