Once market darling, Infosys now a pariah

Once market darling, Infosys now a pariah

Mumbai: Infosys Technologies Ltd, for long India’s software bellwether stock and the bulwark of many a respected portfolio, has lost more than Rs43,631.95 crore—equivalent to 32.9%—of its value, measured by market capitalization, in the past nine months. Foreign institutional investors, or FIIs, have stopped chasing the blue-chip stock even as the rising rupee and fear of the impact of the US subprime crisis on that economy’s financial services industry continue to hurt the outlook for its future revenues.

Shares of the Bangalore-headquartered Infosys closed at Rs1,558 on Friday, continuing a losing streak that began in mid-February, when the stock hit Rs2,415, the highest in the last 12 months. At Friday’s price, Infosys’ market cap is Rs88,994.50 crore.

The share of FII ownership in Infosys has declined from 36.1% at the end of the second quarter of fiscal 2007 to 32.7% at the end of the quarter just gone by. Investors such as Merrill Lynch Capital Markets España and Copthall Mauritius Investments Ltd have partly pared their stake.


Local mutual funds (MFs) have also pruned their Infosys ownership. The quantum of stake held by MFs in the firm was about 3.9% at the end of September 2006; at the end of the second quarter this fiscal, it dropped to 2.9%. Other private investor groups have also cut their holdings in Infosys.

The two other Indian IT giants, Tata Consultancy Services Ltd (TCS) and Wipro Ltd, have also seen significant erosion in their market cap.

While Wipro lost 34.8% of its share price, TCS lost about 24% in the past nine months. However, unlike in the case of Infosys, FIIs have not cut their exposure to TCS and Wipro. On the other hand, they have accumulated these two stocks in the year gone by. FII ownership in TCS went up as high as 8.1% from just 5.9% a year ago.

Analysts say two factors—the information technology (IT) spending by financial services firms in the US and the change in rupee’s value against the dollar—will weigh heavily on the Infosys stock in the coming weeks. Infosys derives 37% of its revenue from clients—a bulk of who operate in the US—in the banking and financial services industry, most of who have been affected by the subprime lending crisis in the US. Tech forecasting firms have predicted a flat growth—5-6%—in tech spending in 2008, but a final picture will emerge in the coming weeks when large US corporations firm up their budgets.

Any change in the IT budgets of the US financial services firms will be known only around January or February 2008, says Pankaj Kapoor, who tracks Infosys for ABN Amro Securities Ltd. “Until then, the Infy (Infosys) stock is likely to trade in a neutral territory."

However, there is no indication from any of its clients in the US financial services sector of potentially shrinking their IT spends, says Shekhar Narayanan, an investor relations executive at Infosys, adding the firm is increasing its revenue exposure in other economies.

“It is a challenging situation," says Narayanan. “We are largely diversifying into other markets and business verticals. We are negotiating potential acquisitions in Japan and in the European region, mainly Germany and France, in the $50-200 million (Rs198-792 crore) range. Also, we have decided to concentrate more on niche areas such as management consulting and enterprise resource planning (ERP)." Such niche businesses are profitable.

And the rupee, the currency that Indian tech vendors meet expenses with locally, has gained more than 10% since the beginning of this year, against the dollar, putting extra pressure on its profits.

Nimesh Mistry, a Mumbai analyst at Man Financial, the brokerage arm of MF Global, calls it a “double whammy" for Infosys. “If there is another interest rate cut from the US Federal Reserve, the rupee will continue its sharp appreciation, leading to lower profit margin for Infosys. On the other hand, if the Fed does not cut rates, the worries in the financial services sector in the US will continue to increase, which could lead to lower IT spends," says Mistry.

The Federal open market committee of the US Fed will meet in December to formulate its monetary policy.

There might be trading opportunities in large IT counters in the short- and mid-term, according to N. Krishnan, head of equity research in India at CLSA India Ltd, the arm of CLSA Asia-Pacific Markets. “However, the long-term outlook on the IT sector is highly bearish," he says.

Still, there are some investors who still believe Infosys is a “buy". India’s largest domestic investor Life Insurance Corp. of India Ltd (LIC), for instance, has been accumulating Infosys shares in past nine months. LIC’s shareholding in the company has gone up from 1.9% in December 2006 to 3.1% in September 2007.

Some FIIs, such as government of Singapore, Fidelity Management & Research and Abu Dhabi Investment Authority, too, have increased their exposure to Infosys.