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Business News/ Market / Mark-to-market/  Infosys results: Is market excitement warranted?
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Infosys results: Is market excitement warranted?

Given that Infosys still has a lot of catching up to do, some caution might be warranted while valuing the company's shares

While the September quarter results included many positives, it remains to be seen if the performance can be sustained. Photo: Hemant Mishra/MintPremium
While the September quarter results included many positives, it remains to be seen if the performance can be sustained. Photo: Hemant Mishra/Mint

It doesn’t take much to get investors excited about information technology stocks these days. Infosys shares jumped by 6.5% on NSE after it announced dollar revenue growth of 3.1% for the September quarter, slightly ahead of analysts’ expectations of about 2.7% growth. Net profit of 3,096 crore was about 4% higher than Street estimates, thanks to better-than-expected margins.

While all this is good, it must also be noted that Infosys now trades at 18.6 times trailing earnings, thanks to the handsome rally in its shares in the past three months. Meanwhile, its revenue grew around 6.5% year-on-year last quarter, less than half the rate at which some of its peers are growing. The disconnect between revenue growth and valuations should worry investors.

The company’s net employee addition stood at over 4,000 employees, the highest in the last 10 quarters. Of course, high utilization rates and a high level of employee attrition would have necessitated increased hiring.

Still, it is heartening to note that Infosys has increased hiring, as this is generally seen as a lead indicator for demand growth. While the company maintained its revenue growth guidance for the year at 7-9%, it must be noted that adverse cross-currency movements mean that growth expectations have actually been upped by about 100 basis points.

Even so, given the rate at which some of Infosys’s peers are growing, this is hardly anything to get excited about. There wasn’t anything exciting about the company’s dividend payout as well. While it may be early days for new chief executive officer Vishal Sikka to finalize plans on how to use the company’s cash hoard, it is an area which needs to be addressed soon.

All said, given that Infosys still has a lot of catching up to do, some caution might be warranted while valuing the company’s shares. Besides, while the September quarter results included many positives, it remains to be seen if the performance can be sustained. As analysts at Citigroup Research pointed out in a recent note to clients, “Infosys’ quarterly performance has been very volatile over the past many quarters. The (valuation) multiple is just about 10% off the three-year high and leaves limited margin of safety. While the company has tried to address challenges on sales effectiveness, cost management, etc., consistently strong performance is required for any further rerating."

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Published: 10 Oct 2014, 11:30 AM IST
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