When the going gets tough, the tough get going. Within the information technology industry, the market’s perception is that Infosys Technologies Ltd is the toughest of the lot.
The market’s bias towards Infosys isn’t new, but it just gets pronounced during a downturn. Since April this year, the company’s shares have fallen at roughly half the rate at which other top-tier IT stocks have dropped this fiscal.
As a result, the stock has outperformed Tata Consultancy Services Ltd, or TCS, and Wipro Ltd by 34% each and Satyam Computer Services Ltd by 40%. Infosys now trades at a valuation premium of about 30% over TCS and about 60% over Satyam. In other words, its price-earnings multiple is 30% and 60% higher than those of its peers.
In a recent research report, analysts at Edelweiss Securities Ltd point out that there was a similar expansion in Infosys’ valuation premium during the previous downturn in 2002. And it wasn’t only a function of market perception that drove the expansion in its valuation premium. Infosys grew at a higher rate than its peers in FY03, both in terms of revenue and profit.
To start with, larger players such as Infosys and TCS gain market share during a downturn, while weaker players get edged out. But more importantly, Edelweiss’ analysts point out: “Infosys’ ability to discern and articulate changes in the environment of a secular, longer-term nature is generally ahead of and better than others. The company is also among the first (if not the first) to prepare itself for changing times.”
This is evident from the previous downturn, when Infosys guided for a growth of just 30% in FY02 (shocking everyone on the street) on the back of 100% growth in the previous fiscal year.
Even this time around, the company has been among the first to give bearish statements about the environment. One of the reasons investors drive up the company’s valuation premium is the perception that it has a better handle on the industry environment.
The last time around, the valuation of other stocks started playing catch-up only after growth was back to normal and growth numbers started to look more comparable. This time around, the downturn is likely to be prolonged and it may hence be a while before the high valuation differential disappears.
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