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Despite decent results, Infosys outlook negative for IT stocks

Despite decent results, Infosys outlook negative for IT stocks
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First Published: Sat, Oct 11 2008. 12 29 AM IST

Updated: Sat, Oct 11 2008. 12 29 AM IST
The markets got a mixed bag from Infosys Technologies Ltd, which reported better-than-expected results for the September quarter, but cut annual guidance more than what the markets had estimated. The significance of the latter certainly outweighs the former, but the negative sentiment related to the cut in outlook was offset by the company’s announcement that it wouldn’t increase its bid for Axon Group Plc. That was the reason Infosys shares fell by just 2.3%, even when the markets fell by as much as 7% on Friday.
The market’s relief over Infosys’s withdrawal from the Axon acquisition is also evident from the performance of HCL Technologies Ltd’s shares, which fell by as much as 9.3%. HCL’s bid of 650 pence a share for Axon was already high, but looks worse in light of the deterioration in the global economy and falling asset prices.
In other words, but for the relieving news on its bid for Axon, Infosys shares could have fallen much more. Another factor that worked in the company’s favour was low valuations. Based on the low its shares hit on Friday, Infosys was valued at just 10.3 times expected earnings for the current year.
Based on Friday’s close, Infosys shares are now valued 12.1 times estimated fiscal 2009 earnings. Note that revenues have grown by 22% and core earnings by over 30% in the first six months of the current year in dollar terms, i.e. even without accounting for the benefit of the sharp rupee depreciation.
But even the company now expects growth to contract sharply. In July, Infosys’ annual guidance implied that revenues in the second half of the year would grow by 20%, slightly lower than the growth in the first half. Its current view implies a growth of less than 10%. But note that about half of that contraction is on account of a sharp appreciation of the dollar versus other currencies such as the euro and pound, which now account for a large proportion of the company’s revenues. If one were to adjust for the impact of these currency movements, the core growth expectation has dropped to 15%, which, too, is a substantial deceleration.
V. Balakrishnan, chief financial officer of Infosys, says that this drop reflects the change in the global environment in the last four weeks. The large extent of capital contraction, he says, will not only impact financial services firms, but the contagion could spread to the retail industry because of a drop in consumer confidence, and eventually to manufacturers. Besides, the European region, which was till recently a safe haven, has begun to get affected badly as well. These circumstances explain Infosys’s cautious outlook for the rest of the year.
The bigger issue, however, is that global problems are only intensifying and the full impact of some of these issues will be felt by Indian IT firms only a few quarters later. The financial year 2009-10 targets of most IT analysts are rather bullish, and don’t seem to reflect these ground realities.
Infosys’ cautious guidance suggests that there is ample room for disappointment, at least as far as next year’s estimates go.
Write to us at marktomarket@livemint.com
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First Published: Sat, Oct 11 2008. 12 29 AM IST