Infosys would have fallen even if M. Pai stayed

Infosys Logo

In its quarterly results, Accenture reported a high growth in its consulting business. It was beyond the analysts' expectation. So when other global companies like Oracle and SAP indicated a higher licence sale, this led the analysts raise expectation for Indian IT companies.

When consulting business picks up, the doors of opportunity opens for IT services to implement those projects. At large this led the investing community to fathom that Infosys will have greater opportunity to grow its business.

Also there were reports of discretionary spending on IT picking up with the different companies. Discretionary spending is also a good sign as it shows high confidence level.

Considering that Infosys is the leader among the Indian IT companies, led to higher expectations from Infosys result and guidance. As one analyst had commented before the announcement of results, “We also feel Infosys will be able to bounce back. One reason is higher exposure to consulting and packaged implementation."

Therefore, the problem was expectations for investors running away from Infosys. So when the results were not at par and the guidance for future stated a mute performance, the analysts downgraded the stock and investors hit the panic button. Adding to it the general change in management structure and the resignation of Mohandas Pai from the board of directors, aggravated the situation which led to the stock sliding down 10%.

Sentiment on NASDAQ

IT stocks were hammered in all the places from BSE, NSE to ADRs. Indian ADRs ended mostly lower on Friday. In the IT space, Infosys was down 13.42% at $63.21, Wipro was down 5.25% at $14.07 and Patni was down 0.05% at $21.28. On the NASDAQ, though very timid growth, but as expected the shares of IBM were up by 0.75% at $166.21 and Oracle was up by 1.12% at $34.18, the surprise fall was from Cognizant which was down by 2.55% to $63.21. It was surprising because Cognizant was considered by analysts as the fastest growing company which is catching up with Wipro. Some consider that it may bypass TCS and Infosys. But maybe we should leave that to when it happens.

Our take: Infosys

Even after a 10% fall yesterday, April 15, 2011. The company is expensive.

Its March quarter revenues went up 21.24% year-on-year to Rs 6,668 crore. Net profit at Rs 1,730 crore was up 20.98. Their year-end revenue is at 20.08% up at Rs 25,385 crore from Rs 21,140 crore. The ESP reported for FY2011 was Rs 112.26. (data from BSE).

For a company which grows at a EPS Growth Rate of 13.38% over the last three years, is trading at a PE of 27.93 times. Now, if taking its cash of Rs 15,165 crore and distribute between its approx 57.26 crore shares, it will give each share holder Rs 265. Even after this the company will trade at a PE of close to 25 times, compare this to Sensex, which has a PE of 21.02 times.

Add this to the global scenario where dollar is expected to weaken further, the future of Infosys is not very bright considering majority of its income is from the US, which is essentially in dollar.

Perhaps the best thing to do is look at other opportunities in the market.

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