Infosys: Nice going

The earnings guidance for FY09 is not bad and should cap the downside for the stock.

Infosys' guidance for FY09, which says it will grow revenues by about 20 per cent to Rs 20,000 crore and earning per share by 16.3-18.2 per cent to Rs 92.30-93.90, is not terribly exciting.

But it is in line with what the street expected and given that the environment is generally weak, actually heartening. The guidance could well cap the downside for the stock which shot up by over 6.2 per cent on Tuesday to Rs 1,511 levels.

At these levels the stock trades at a forward price earnings multiple of about 16 times for FY09.

However, a major P/E re- rating appears unlikely at this point given that the guidance for the first quarter of FY09 is weak""-earnings will de-grow by about 5 per cent sequentially.

But that is mainly because of salary hikes; what is more disappointing is that revenues will grow less than one per cent sequentially and therefore, margins will fall.

The Rs 16,692 crore Infosys could outperform the market if the rest of corporate India doesn't perform up to scratch and numbers from other large companies turn out to be disappointing.

However, if other companies do well and indicate that their earnings could grow well above 17-18 per cent, Infosys, which turned in a net profit of Rs 4,659 crore in FY08, is unlikely to get strongly re-rated.

The main reason for this is the weak US economy that may slip into recession. Infosys' for FY09 guidance assumes stable pricing for projects though prices have gone up over the past year.

The business doesn't seem to have lost momentum: Infosys has closed out three large deals during the March quarter and added 40 clients.

The BFSI space, which is the largest revenue vertical for Infosys, has not seen project cancellations though decision ""making has been delayed.

Meanwhile, the numbers for the last quarter of FY08 haven't been too bad: in a difficult environment the tech bellwether has managed to maintain operating profit margins at 32.54 per cent.

The management says it will maintain margins in FY09 despite sales and administration costs being 14 per cent of revenues.The company's key strength: a cash balance of Rs 8,000 crore.

Oil retailers: Unlikely to recover

Oil marketing companies(OMC) like BPCL will once again be hit by under-recoveries or the difference between the cost of production of auto fuels, kerosene and domestic LPG and their retail selling price which is lower.

With global crude oil prices crossing $ 100 per barrel in the March 2008 quarter, the problem could be accentuated, even if auto fuel prices were hiked in mid - February 08.

The government and upstream players like ONGC will bail them out partially: the under-recoveries for FY08 are estimated at Rs 78,000 crore and the government will compensate OMCs through oil bonds for 57 per cent of this amount.

As such, BPCL's net sales for Q4FY08 should rise 24 per cent but its operating profit would decline 42 per cent and that's despite expected stronger gross refining margins.

The company should end FY 08 with net sales of Rs 1.08 lakh crore, a rise of 11 per cent and a net profit of Rs 1,740 crore, a fall of 3 -4 per cent. The stock at Rs 411, has declined 21 per cent since the start of 2008, broadly in tune with the broader market and trades at merely 4.3 times estimated FY 09 earnings.

However, the uncertainty relating to under "" recoveries, in a rising crude price environment, should make it an under-performer going forward.

For IOC, under - recoveries are estimated at Rs 16,600 crore in the March 2008 quarter as compared to Rs 8,800 crore levels in Q3 FY 08. Nevertheless, IOC's operating profit should rise just 5 per cent in Q4FY08, on a revenue growth of around 13 per cent.

IOC is expected to end FY 08 with net sales of Rs 2.43, lakh crore, a rise of 13 - 14 per cent while the net profit should be around Rs 10,081 crore, a rise of 80 per cent. At Rs 460, the stock trades at 4.4 times estimated FY 09 earnings and should be an under - performer going forward.