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Are analysts writing off Infosys too early?

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Updated: Saturday, July 14, 2012, 9:35 [IST]
 
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 Are analysts writing off Infosys too early?

One business newspaper had a screaming headline that "TCS is the new bellweather" replacing Infosys amongst IT investors. A few hours later an almost similar headline on a leading portal had suggested that TCS had replaced Infosys as the new bellweather in the stock markets.

Are analysts writing off Infosys a little too early?

Perhaps not, as things are looking more dismal than ever before on several fronts.

It's been a second successive quarter of bad performance for Infosys in a row and its future guidance is not too encouraging. Revenue guidance in dollar terms of just 5% is a pretty muted guidance, when compared to NASSCOM growth guidance for the IT sector at 12%. This is one outlook that saw the share price tanking by more than 8%, the day the company declared its results.

But, to be fair, business dynamics are so volatile for the IT business, it would not be a surprise if Infosys beats this guidance of 5% revenue growth for 2013. In the past the company has beaten its own guidance several times and if business conditions improve, the company could certainly do it again.

One thing that works in favour of the company is its huge cash reserves of $ 4.1 billion. This is a fairly large sum, and should the company put the money to good use, with a sensible acquisition we could see things working in its favour once again.

Margins are one reason why the stock took a hammering on the day its results were declared. Again it's unlikely that these are going to improve anytime soon, given the precarious business environment around the globe.

Ebitda margins, a key measure of profitability, declined to 28 per cent against estimates of 30 per cent for Q1 2013. This reveals that the company which thus far has never sacrificed high margin business for volumes is facing pressures.

The problems for Infosys is not only results, but also other issues. The company has got entangled in allegations of visa related fraud and other issues.

Apart from this the real worry is the threat the company faces from American laws, which may make it harder for US based companies to outsource to Indian companies like Infosys. In an election year in the US, the calls to stop outsourcing to India, is only going to get louder.

For years Infosys has delivered results, making it one of the best wealth generating company for its shareholders. But past track record is no indication of future performance. It's going to be pretty tough going ahead and analysts are clearly anticipating the same.

The stock might languish at the current levels of Rs 2200 for sometime, as investors are not going to accord higher price to earnings multiple for a company that is expected to clock only 5% revenue growth.

GoodReturns.in

Topics: infosys
Story first published:  Saturday, July 14, 2012, 9:29 [IST]
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