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No other stock traded on the Indian bourses reacts consistently the way Infosys does. A swing of 8-10% on the result day is normal for the stock.The ‘long strangle’ option strategy (buying an out of the money call and similar number of out of the money puts) is something that most option traders practices on Infosys’ result day. The build of position in the stock is the main reason for the stock movement. The company too contributes to the fun by announcing unpredictable numbers.
This quarter the ‘calls’ have won. Infosys surprised the market by announcing better than expected numbers resulting in the stock shooting over 11%. However, the devil is in the details. While the market has reacted sharply to the numbers, it is the consistency of these numbers that is key for the long term revival of sentiments in the stock.
We look at the good, the bad and the ugly of Infosys’ first quarter numbers
The Good
· Better than expected all round performance with revenue, margins and net profit above market expectations
· Strong sequential volume growth of 4.1% against 1.8% in the previous quarter
· Company has maintained its guidance against expectations of a cut in current year revenue target
· Management is cautiously optimistic for rest of the year, which is a much better choice of words as compared to complete confusion in the previous quarter
The Bad
· Discretionary spend by clients continues to be stressed
· Pricing was flat. An improvement in pricing is one of the first tell-tale signs of improvement in external scenario
· Wage hike likely to impact operating margin by 3% from September quarter
· Employee attrition rate at 16.9%, an all time high.
…and the Ugly
· Global sales head,Basab pradhan quitting within a month of Narayana Murthy taking charge suggests instability in the short to medium term
· Raising salaries without being able to pass on the cost is unlikely to arrest the downward margin slope of the company. Operating margins have fallen from 28% in June 2012 to an expected 20% in September 2013.
· Raising salaries without being able to pass on the cost is unlikely to arrest the downward margin slope of the company. Operating margins have fallen from 28% in June 2012 to an expected 20% in September 2013.
· Narayan Murthy’s game plan for reviving the company is not revealed, adding to investors anxiety of consistency in numbers and business model
Moving about like an headless chicken, the company now has a head.But the market will be waiting to see whether Narayan Murthy has evolved with the industry or is he keen on taking the company back to being the lead outsourcer for global companies at lower cost.
