Infy underperforms IT index ahead of results

The stock price of Infosys Technologies, which is scheduled to announce its fourth quarter results on Friday, closed today at Rs 2,043.35 on the Bombay Stock Exchange "" 6.4 per cent below its close of Rs 2,183 on January 11 this year "" when it had declared its third quarter results.

In each of the previous three quarters, the company's stock price prior to the announcement of results was higher than its price on the result day. The company had reported 50 per cent growth in revenue and profit for the third quarter.

The Infosys stock underperformed the benchmark indices and BSE IT index with an 18 per cent decline in price from its peak of Rs 2,439 on February 19. The market reaction looks severe and ignores the company's ability to post better results than its guidance.

In the trailing twelve months ended December 2006, the company's earnings per share went up by Rs 20, while its market price rose Rs 383 over the last one year. This means Infosys gets a price-earning ratio of 19.15 times for every additional rupee earned compared with its current PE ratio of 33.57.

The market re-rating for the software sector came immediately after the perceived US slowdown and some unfriendly budget proposals such as services tax on leased or rented premises and imposition of minimum alternate tax (MAT). This took a toll on Infosys and its peers with the Bombay Stock Exchange's IT index trailing by 13 per cent from its February peak.

Analysts say the revenue and earnings growth rates of all frontline IT companies will fall in 2007-08. According to HSBC research, the revenue growth rate for eight majors will decline from over 40 per cent in 2006-07 to 30.5 per cent in 2007-08. The net profit growth rates, according to HSBC, may decline from 43 per cent to 26.7 per cent.

Motilal Oswal believes that the Infosys guidance is likely to be muted due to conservative outlook towards the US economy despite business outlook with clients remaining strong. The EPS growth guidance is likely to be lower than the sales growth guidance due to expected margin pressure from wage inflation, rupee appreciation as well as likely equity dilution in the fourth quarter of 2006-07.