Why is Infy result always a puzzle?

It is true. In beginning was indeed the word and the word was Infosys. The word then became a number — no it wasn’t 42 — and the number the Holy Grail of corporate earnings guidance. The grail became a quest. Analysts vied with each other to drink from the cup that would give them ‘complete visibility’. That, as things turn out has been rather tough. The wise men at Hosur Road have more chops than the men with spreadsheets. For 26 quarters (see graphic), Infosys has always performed better than expectation and 13 quarters it has done so by more than 10%.

Seven years ago when Hosur road never spoke about its earnings a young analyst working with an Indian brokerage house sniffed and said: “It will be just a matter of time before the market catches up with them and then you see what happens to stock price.” Infosys bashed on regardless. The analyst is now greying and covers steel. “Infosys has mastered the art of under promising and over delivering,” says Nilesh Shah, CIO, PruICICI AMC.

Like anyone new at the crease, Infosys was susceptible when it started providing its annual guidance in ’01. “I had started covering IT a year before that and I remember they underguided and the stock fell almost 40%. It is not that they always get the better of you,” says an analyst at an US brokerage. What makes Infosys so difficult to track is that they are no showboats but are actually very conservative. The analyst, trained in catching a bluff when someone’s talking big, is usually unable to change direction.

“You actually have to know the management’s psychology to really make your modelling work. They like to surprise but are conservative at the same time,” says an analyst who does not wish to be quoted. The cycle very often begins with the company coming in with a very low guidance, especially in the years when business is weak like post 9/11 in ’01 and then in ’03 when the anti-offshoring tirade started in the US.

“Usually a low guidance and weak environment means I as an analyst try and stay close to the guidance. You don’t want investors to buy a stock and then see it fall. But when you call the management before the earnings season they sometimes betray the fact that the market is underestimating them,” says an analyst.

That’s the ‘a-ha moment’ if the analyst can catch it. “I have often sensed that and revised my estimates upward and got pretty close to the actual,” says the analyst. Sometimes the management expresses a surprise when the analyst is too wide off the mark. “But if you are just 5-10% of the mark then that’s the twilight zone and you won’t ever come to know,” he says.

In this case too much is clearly an embarrassment. “The problem with Infosys is that when they outperform the expectation they always do it by a large margin. Small margin is fine. But large is bad because many people exit the stock when the guidance is low and miss the rally when the stock goes up on good results,” says an analyst with an FII brokerage. The ironic things is that the company puts out a large amount of data.

“Modelling errors for Infosys are the least,” says an analyst at an Indian brokerage. But this is really of no help. But most of this is relevant in a historical perspective. Contrast this with say, the auto industry or the steel industry. These industries puts out data on total production output, company market shares on a regular. Then there are customers and vendors of company who can be a source of good information. “There is no such data on IT companies,” says an analyst.

Is there codex that can end the quest, reveal the grail? “It has to be the number of employees added. These numbers are not delivered. Numbers have to be got from company. IT companies will never give information on number of employees to anyone. [Employee Numbers are usually available at the end of each quarter but not in between]. It is very sensitive information. Analysts therefore remain in a grey area and therefore numbers are far from real,” says Mr Shah. Just like the grail.

Original story

Infy result not a puzzle
The Infy Result is not a puzzle, it is just that the financial analysts have not understoond that whatever guidance is given we just need to add 3% to the total and there you get what Infy will achieve. Infy has been the darling of the press and like every superstar, it has to guarantee that every release is a hit, so there will always be a little bit of suspense.