Infosys: Buy or Sell?

The stock outperformed the market in six out of nine times post results. Given the latest results and the road ahead, should you still stay invested?

Infosys has once again disappointed the Street by cutting its full-year (FY13) revenue guidance further, both in rupee and dollar terms while declaring its second quarter results on Friday (October 12). The markets gave a thumbs-down to the announcement and the stock has lost nearly 7% in the past two trading sessions.

This is not a first time the stock of the second-largest software exporter has seen a sharp fall post earnings. In last nine out of ten times, since July 2010, the scrip had underperformed the market by falling more than 3% on a day of announcement of the results.
However, it had recovered smartly, outperformed the market in six times and performed in-line with the market in three times post announcement of quarterly results till the time of release of next quarter results.

On the charts

An analysis of the price movement since beginning of current fiscal reveals that the stock has outperformed the market after the announcement of financial results. On 13th April, 2012 it had tanked 13% after company, which earns most of its revenues from exports to the US, forecast a muted growth in dollar revenue terms for financial year 2013 while declaring its January – March 2012 quarter results.

The stock had outperformed the market afterward by rising 4%, as against 2% gain recorded by the benchmark Sensex till announcement of the results for the first quarter April – June 2012 on 13th July 12.

However, the stock tanked 8% after the second-largest IT company lowered the already conservative revenue growth outlook almost by half, to 5% from the earlier 8% to 10%. Meanwhile, the scrip has bounced back sharply by rising 17% as compared 10% jump in benchmark till announcement of the second quarter results on 12th October 2012.

So, what should you do now?

Most analysts have recommended the stock with upside target of 8 – 20% from the current level. Thirteen out of seventeen brokerage houses rated the stock with “’Buy” or “Accumulate” with target price of Rs 2,520 to Rs 2,900 in next twelve months.

For instance, analysts at Prabhudas Lilladher have retained ‘Buy’ rating on the stock with revised target price of Rs 2,900. The local broking house expects FY13 momentum to be in-line with guidance.

“The management has retained their FY13 revenue guidance. The asking rate for H2FY13 is 3.7% CQGR. H2 (October-March) is seasonally a weak quarter, but the management was confident of attaining the guidance on organic basis. The deal wins, client budget and bottoming-out ramp-downs has been the key reasons for the management confidence,” the analyst said in a report.

“Post first half of 2013 performance, the company requires a minimum 3.5% quarter on quarter growth rate in the next two quarters to achieve its FY2013 dollar revenue growth guidance, which in the current scenario looks a bit stretched. The company can achieve 5-5.5% year-on-year revenue growth in FY2013, including revenue from Lodestone” said analyst at Angel Broking in its report.

FIIs keep faith

Meanwhile, foreign institutional investors (FIIs) continue accumulating shares of the Bangalore-based IT major. Overseas investors have acquired additional 1.53% stake in the company during the recently concluded quarter.

In the quarter ended September 30, FIIs have raised their stake in the country’s second-largest software services exporter to 39.42% from 37.89%, shareholding data available on the Bombay Stock Exchange website showed.