Infosys stock: Will greed overcome fear?

Business

oi-Sunil

By Sunil Fernandes

Published: Saturday, April 14, 2012, 12:17 [IST]

The Infosys stock eroded Rs 20,000 crores in investor wealth in a single day. For a bellweather stock this kind of wealth erosion is unheard of.

The sharp fall in the stock reminds one of what Warren Buffet said, “Be fearful when everyone is greedy and be greedy when everyone is fearful”. Does this mean that the fear that gripped the Infosys stock (down a staggering 12.6% on Friday) makes it an ideal time to pick the stock? Let's examine some facts.

When Infosys declared its third quarter results in January, the stock plunged almost 8.4% on January 12, in a knee jerk reaction to the results and closed at Rs 2588. It recovered systematically and before Friday's 4th quarter results was trading at Rs 2732. This means that when Infosys falls sharply, the stock has a tendency to recover.

Now coming to the more fundamental aspects, if we were to assume that the company reports an EPS of Rs 165, then the stock at Friday's closing level of Rs 2403, is trading at a price to earnings multiple of 14.56. This is pretty decent for a company of the size of Infosys and even considering the fact that the company is expecting a muted performance in FY 13.

Now, the EPS is achievable considering the fact that Infosys is unlikely to look at a salary revision immediately and also considering the fact that it has factored the rupee to dollar at 50.88. There is every possibility that the rupee may remain above these levels improving margins for Infosys.

Now coming to the risks, most are external. First, the pressure on outsourcing to India from the US remains a threat. Secondly, the European environment is getting worse. As we write, the Spanish bonds have once again saw yields jump and fears of the European contagion spreading from Greece to countries like Spain and Italy has become real. The European environment and hence reduction in discretionary spends are bound to affect Infosys.

Secondly, pricing flexibility might not be as it was in the last few years, which will have an effect on margins.

Thirdly, if the rupee appreciates it will squeeze margins further.

Clearly, it seems that all of the above factors will ensure that the Infosys stock remains subdued. It's unlikely that greed will overcome fear at the current levels. Investors could wait for some more time and perhaps look at entering the stock closer to the Rs 2000 levels.

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