With SEC investigation behind it, investors warm up to Infosys stock
2 min read.Updated: 24 Mar 2020, 11:09 PM ISTR. Sree Ram
Even after the 12% rally in its shares on Tuesday, stock still trades at 14 times forward earnings, a 12% discount to TCS
At the beginning of February, Infosys was trading at 18.3 times FY21 earnings estimates, which was about a 16% discount to TCS’s valuations.
Shares of Infosys Ltd gained 12% on Tuesday after the company said it does not anticipate any action by US market regulator Securities and Exchange Commission (SEC) on a whistle-blower complaint. Infosys said SEC has concluded its investigation into the whistle-blower complaint, which had alleged wrongdoing by the company’s top management.
The firm had already published results of its internal investigation, which had given a clean chit to the top management. This helped the stock recover its losses suffered since the time the complaint was raised. The fact that Infosys maintained its growth momentum in the December quarter helped as well.
Of course, the stock has since come off, due to the broad market correction. Even so, the update on the SEC probe is a positive. “Foreign institutional investors generally curtail investments in companies facing SEC probe," said an analyst at a broking firm, requesting anonymity.
Despite the recovery in the stock, Infosys continues to trade at a discount to market leader Tata Consultancy Services Ltd (TCS), underscoring investors’ preference for the larger peer.
At the beginning of February, Infosys was trading at 18.3 times FY21 earnings estimates, which was about a 16% discount to TCS’s valuations. Even after the 12% rally in its shares on Tuesday, Infosys still trades at about 14 times forward earnings, a 12% discount to TCS valuations.
“Infosys bottomed out at 11X (times) 12-month forward earnings during GFC (global financial crisis). However, the stocks traded at these multiples only for a period of six months before moving up again. Rather than time the bottom, it is prudent to buy the stock at the lower-end of the trough multiple i.e. 13 times even in a deep recessionary environment," said Kotak Institutional Equities in a note.
Of course, the challenge for Infosys and other Indian IT firms is disruption from the coronavirus outbreak and the resultant slowdown in business. Analysts at Kotak have already cut earnings estimates for FY22 by about 14%. If things worsen, global growth estimates and IT demand projections will be brought down further.
Recently, Accenture Plc. sharply cut revenue growth guidance for six months till August this year.
Analysts at Kotak estimate a sequential decline in revenues at Infosys in the June quarter. Even so, the company is projected to fare relatively better than others, helped by the scale-up of large deals it won in the recent past and improved competencies in digital offerings. “Infosys in our view will be in the top quartile of growth rates and continue to gain market share for the next few years," added the analysts at Kotak.