4 reasons why there may be more downside risk to the Infosys stock?

Business

oi-Sunil

By Sunil Fernandes

Published: Friday, March 14, 2014, 8:40 [IST]

On Thursday the Infosys stock nosedived by 8.5 per cent, following poor commentary from the management after an investor concall. This is the only stock from Sensex stocks, whose quarterly results remain highly unpredictable and the stock fluctuates anywhere between 10 and 20 per cent on the day of its results. Here are 4 reasons why the stock may have some more downside risk left, after nosediving on Thursday.

Brokerages downgrade stock

Brokerages, including foreign brokerages have downgraded the Infosys. Kotak wrote, "We expect the stock to correct even as some of the efforts on turnaround are yielding results."

Bank of America-Merrill Lynch has cut its price target on the stock and Equirius did not paint a rosy picture either.

"In a December note titled Infosys rally has played out and other notes, we had pointed out why in spite of having top class domain and service capabilities, Infosys will continue to struggle to improve its account mining," Bhavin Shah of Equirius wrote.

Rupee fast appreciating

The rupee has appreciated sharply against the dollar from a historic low of 68.81 to the current level of 61. With a sharp fall in the current account deficit the currency threatens to get into the 50s mark again. Not good news for software exporters like Infosys, which earn dollar revenues.

Stock has already had a sharp run

In 2013, Infosys was one of the top performing Sensex stocks in terms of returns. In the last 1 year since March 13, 2103, the stock has given returns of more than 20 per cent, despite its drop of 8.5 per cent on Thursday. As such, it's not available at the cheapest of valuations.

Management commentary overly pessimistic

"At the beginning of the quarter (Q4) we gave guidance for FY 2014. Several factors may result in our revenues to be near the lower end of guidance," Infosys CEO S D Shibulal said at a Barclays investor meet.

"At the broad level some of our clients have seen slowdown in their business, these are across various verticals leading to unanticipated project ramp downs and cancellations in Q4."

Chairman N Narayana Murthy also painted a far from rosy picture. Murthy said that the revenue would be at the lower end of the guidance and expressed disappointment at the poor margins at Infosys in the last several quarters.

"We expect to be somewhere between 11.5 percent and 12 percent in our revenue growth. Much more like 11.5 percent compared to what is being proclaimed as the Nasscom industry growth rate and that is about 13 percent," a leading business portal reported.

This is certainly not positive for the stock. Clearly, the stock maybe headed lower and the Q4 numbers look certain to disappoint investors. It's possible if you want to buy into the stock, you can do so at lower levels.

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