Once again Infosys’ results failed to live up to market expectations. The stock closed the day at Rs 2,260, down 8.35 per cent over previous day’s close. While analysts are busy digesting the company’s numbers, here are five takeaways from its result announcement and subsequent price action.
No guidance
For a company that has been a pioneer in corporate governance, the discontinuation of quarterly earnings guidance from Infosys is surely a matter of concern. The stock market has always looked at its guidance to predict what the next quarter would be like for the software services industry. While there were rumours that the IT firm would stop announcing quarterly guidance in the March 2012 quarter as well, it did happen this time.
Order cancellation
For the June 2012 quarter, Infosys missed achieving the numbers that it had guided for making it the second straight quarter where it missed the guidance. This time, Infosys said, it was on account of one its large European client cancelling a $15 million contract. It has lowered its full year revenue growth guidance from 8-10 per cent to 5 per cent.
If this cancellation is a one-off development, it will probably be ignored, but any further such cancellations in other companies will be negative. Analysts have been talking of a slowdown in the sector, but cancellation of existing orders is something that has not been envisaged by the market.
Sharp share price reaction
Infosys’ share price drop of nearly 8.5 per cent again reflects the shocked reaction of market participants on its results. In six of the last seven quarters, the company’s share price has reacted sharply (more than five per cent) after result announcements. The reaction is a reflection of hope being built up in anticipation of a good set of numbers. But Infosys continues to disappoint.
Valuation
Thursday’s hammering of the stock has resulted in its valuations coming close to post-Lehman crisis levels. The stock trades at 14 times its trailing four-quarter earnings, which was the level it traded at in November 2008 when Infosys had traded below the 14 P/E mark for a period of five months. But those were times of absolute panic, where visibility was, at best a few days, and the global economy was facing crisis. While there are problems in Europe and the US and the markets are drifting, the situation isn’t as bad as it was then. However, companies are tight-fisted over their IT expenditure, which is impacting software firms.
Infosys seems to be hit more severely than other IT companies. Kotak Securities explains it by saying that Infosys has a higher share of discretionary revenues contributing to its revenue, which accounts for 40 per cent of incremental revenue as compared to 15 per cent for some of its peers. HCL Tech, during its March 2012 results conference call, had said that decision making for IT spends has now moved from the CTO (Chief Technical Officer) to either the CFO or the CEO of the company, adding to the delay. It’s probably due to these reasons that Infosys slashed its dollar revenue guidance for the full year in a span of just three months. Perhaps, Infosys is witnessing a scenario similar to 2008, which reflects in its valuation.
Peer pressure
Is it too late to sell the stock as it trades near bottom valuation? The answer to this question may probably come from TCS, which announces its results later today. A performance similar to Infosys will underscore the stress in the sector, but if TCS does not agree with Infosys in its outlook, the valuation gap between the two companies will increase further.
Infosys, during the peak of 1999-2000, was trading at valuations of nearly 100 times its trailing earnings, which analysts could justify by saying that the company was doubling earnings, so it deserved those prices. Now, if its earnings will grow only at 14.4 per cent y-o-y in FY13, it will be difficult for it to sustain high multiples.