With the US economy at the brink of a recession, technology services firm Infosys Technologies Ltd’s annual guidance is all the more important. In fiscal 2002, the last time the US went into recession, Infosys’ growth targets were way below analyst expectations and all IT stocks had corrected sharply.
But this time around, IT stocks have already underperformed the market by about 40% in the past year, so expectations at least are running a little low. The Street seems to be expecting Infosys to set a 20% revenue growth target in dollar terms and a 15-17% earnings growth target in rupee terms. Anything below this could lead to a further correction in IT stocks, but again, the fall is likely to be limited given the underperformance in the past.
At the same time, the chance of the company springing a positive surprise and a subsequent rally in IT stocks is also dim. Most Indian IT vendors have started sounding cautious about the near-term outlook, a marked shift from the stance taken about three months ago. In any case, Infosys tends to be conservative with its guidance, and it’s highly unlikely it will stick its neck out, given the uncertainty in the US market.
Its December quarter results suggested that the slowdown in the US is already affecting volume growth, with year-on-year growth being the lowest since the nadir in fiscal year 2002. The company enjoyed a 5-6% increase in average price realization in fiscal 2008, but pricing assumptions are likely to be conservative for this fiscal year. After all, the last time the US went into recession, billing rates had fallen sharply.
In fact, one should take Infosys’ rupee guidance with a pinch of salt, since it will be based on the March quarter-end rate of Rs40. Most brokerages expect the local currency to appreciate to about Rs36-38 during fiscal 2009, which started on 1 April, and that could put pressure on the company’s management to achieve its guidance, assuming all other factors remain the same.
Also note that despite its underperformance, Infosys still enjoys a stock price that is 18 times its trailing earnings per share. Even if the company targets an 18% growth in rupee-based earnings per share, which is higher than Street expectations, that’s nothing to get excited about.
Money supply growth falls sharply
With the inflation rate at 7.4%, the chorus of voices asking for a tightening of monetary policy has become louder in the past few weeks.
The Reserve Bank of India (RBI) has so far responded with open-market operations aimed at sucking out liquidity. But the data on money supply show that RBI has already been in a tightening mode for the last couple of months. Year-on-year growth in total money supply, or M3, has come down from as high as 23.8% in mid-January to 20.7% at the end of March. In mid-January, the rate of growth of money supply was well above the rate in the year-ago period. At the end of March, however, money supply growth closed the fiscal year below FY07’s growth of 21.3%.
But the growth in FY08, at 20.7%, was much higher than the Central Statistical Organisation’s advance estimates for gross domestic product (GDP) growth at current prices, which was 13%. In FY07, money supply growth was 21.3% against GDP growth of 15.7% at current prices.
Even if we increase the GDP growth estimate in FY08 to reflect the spurt in inflation in recent weeks, there’s still a big gap between GDP growth at current prices and the rate of growth of money supply, and the excess liquidity spills over into inflation, either in goods and services or in asset prices. That’s the reason why monetary policy will have to tighten further.
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