Infosys: Selloff fall

There's no fundamental reason for the Infosys stock to fall

Infosys Technologies has beaten both its earnings guidance and consensus estimates by a comfortable margin. Earnings grew 11.2 per cent last quarter, higher than the 7 per cent growth most polls had predicted.

The sour spot in the results was that revenues in the December quarter grew at 7.2 per cent, not much higher than the guidance given. Besides, there's a marginal downward revision in the revenue guidance for the full year.

But one needs to keep in mind that this was despite a 4.2 per cent drop in average rupee rates (used for translating dollar revenues into rupees), compared with the September quarter.

In dollar terms, the revenue guidance for the full year has been raised from around $1,558 million to $1,590 million. Volume growth continued to be impressive at 12.1 per cent for the IT services business, compared to a growth of 12.6 per cent in the September quarter.

Although average rupee rates were 4.2 per cent lower, its negative impact on operating profit was less at 2.3 per cent, simply because about 50 per cent of the company's expenses are also in dollars.

Hedging gains offset that to the extent of 1.1 per cent, leaving the net impact of the rupee appreciation at 1.2 per cent on the operating profit.

It's important that despite this, Infosys managed a 90 basis points improvement in operating margin. Savings were made on overseas travel, branding expenses and on other items thanks to economies of scale.

The bottomline is that Infy now expects earnings to grow 49 per cent in FY05, compared with an estimate of a 44 per cent growth at the end of the September quarter.

The markets, however, were expecting bigger surprises from Infy, especially on the pricing front.

Infosys had good news on that front too "" it said that new clients continued to come in at rates that are 4-5 per cent higher than average rates and also that some existing clients had agreed to rate hikes.

But it's too soon to expect this to reflect in overall billing rates. The drop in Infy's share price, in line with the CNX IT index is more to do with the broad selling in the Indian markets.

Neyveli Lignite

Neyveli Lignite Corporation (NLC) has declared a 93.6 per cent growth in net profit in the last quarter, helped by "other income" rising 157 per cent y-o-y to Rs 229.11 crore and a 123 per cent growth in profits of the power generation division.

Segment profits of this key division have improved primarily due to settlement of dues with southern SEBs and tax free bonds that had been issued in favour of the company.

The interest income from these bonds was accounted under the head "other income". Other income has also risen due to withdrawal of contingency provision worth approximately Rs 134 crore.

Profit growth in the December quarter has however, fallen sequentially by 15 per cent, despite other income dropping 73 per cent in the September quarter.

It's not only "other income" which made the difference, as even operating profit in the December quarter has sequentially dropped 42 per cent.

But, in the September quarter, the company had also seen its incentives to electricity boards on securitisation of power dues shrink almost 90 per cent. That reduced costs and increased the bottomline in that quarter.

Profit growth in the short term appears capped in the absence of fresh triggers. Analysts point out that the next trigger in the form of capacity expansion will happen two to three years down the line. That's one reason why the stock has declined almost 11 per cent in the last week.

Not so gung-ho FIIs, after all

Indian markets continue to fall, but it's interesting to note that things aren't as bad in all emerging Asian markets. MSCI's index of non-Japan Asian shares have been more or less flat this week.

In fact, Indian markets have underperformed other Asian markets since the beginning of the year. Year till date, the Indian markets have fallen by 7.6 per cent, the highest among emerging Asian markets.

Could it be that the Indian markets had risen too soon, too fast at the fag end of the previous year and is only correcting now? At first look, that seems plausible - the Sensex had gained 16 per cent during November and December 2004, posting among the highest gains within emerging Asian markets.

Gains in most other Asian markets were in single digits. But even the Indonesian market had gained around 16 per cent in November and December and its Jakarta Composite index has been flat this year.

Another interesting fact is that while FIIs were buying heavily in the cash segment, some of them were sellers in the futures segment.

Since July, FIIs have been net sellers in the futures market to the extent of around Rs 7000 crore. Around 85 per cent of this was in the single stock futures segment, which is not normally used for hedging purposes.

The sales could largely be associated with arbitrage strategies which involve buying in the equity market and selling in the futures market. FIIs, it now seems, weren't as gung-ho as the markets thought them to be.

With contribution by Mobis Philipose