Is Infosys share price fairly valued at current levels?

Business

oi-Sunil

By Sunil Fernandes

Published: Saturday, October 12, 2013, 9:38 [IST]

Infosys reported Q2 FY 2014 numbers that were largely in line with expectations. What pushed the share prices higher by 4 per cent on Friday, when the company declared its results was the dollar revenue guidance which was upped from 6%-10% to 9-10% for FY 2014.

Six months ago, the share price of Infosys had hit a 52-week low of Rs 2186 and has since rallied more then 50% to the current levels of Rs 3278.

At the current levels the share price may reflect fair value and getting whopping returns like in the past 6 months seems far fetched.

Even if we assume that the company reports an EPS of Rs 193 for the current financial year 2013-2014, the company's price to earnings multiple works out to around 17 times, which would be reasonable.

Now compare this with India's largest software services company Tata Consultancy Services. TCS is likely to report an EPS of around Rs 84 for the FY 2013-2014. This means that at the current market price of Rs 2128, the stock is trading at a price to earning multiple of more then 22 times.

This means that Infosys gets a p/e multiple of 17 times and TCS gets a p/e multiple of 22 times. It's always possible that TCS would get a higher multiple because it is expected to grow at a faster pace then Infosys and is much bigger then Infosys.

Also, Infosys margins for the quarter ending Sept 30, have been a little disappointing. It's also important to note that in the last few quarters TCS has reported steady growth numbers, while Infosys' numbers have been quite erratic and analysts would like to see more stability going forward.

All in all, it seems that most of the software stocks are reasonably valued. The fact right now is that there is so much money around with foreign institutional investor, thanks to easy liquidity conditions being followed in the US, Japan and Europe, that these set of investors will keep chasing quality stocks, driving them to unreasonable multiples.

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