Beating the street handily

Infosys may have raised its guidance estimates, but its valuation has fallen slightly post results

The highlight of Infosys Technologies' June quarter results announcement was the aggressive increase in guidance estimates for FY05.

At the beginning of the year, the company had said it expects revenues and earnings to grow 24 per cent and 20 per cent respectively. This has now been revised to 40 per cent and 34 per cent.

Infy has revised its guidance quite a few times before, but the quantum of increase this time around has taken everyone by surprise.

Previously, the upward revision in guidance was done essentially to reflect a better-than-expected performance in the just-concluded quarter.

The latest guidance implies, rather strongly, that the improvement in performance (vis-a-vis earlier expectations) would continue through the fiscal.

While earnings are expected to rise 3.9 per cent in the September quarter, the FY05 EPS estimate factors in an average growth of 6.2 per cent in the December and March quarters. In the past, Infy's guidance generally factored in a growth of 0-2 per cent.

Interestingly, the revised EPS estimate of Rs 62.7 is higher than not only consensus estimates (less than Rs 60), but also the most bullish estimates.

While this will lead to a revision in analysts' estimates (in most cases, upwards of Rs 62.7), it has surprisingly not resulted in an improvement in valuation for Infy.

Based on Monday's price on the National Stock Exchange, Infy got a valuation of over 23 times consensus FY05 estimates. Based on Tuesday's closing price, the valuation had fallen to 22.4 times.

The reason given for the stock's lacklustre performance is the dip in volumes because of day-traders' protests. But that's not entirely true "" Infy's turnover yesterday was about 36 per cent higher than the average for the year.

Overweight on technology?

NSE's CNX IT index gained 0.7 per cent on Tuesday, compared with a 1.1 per cent fall in the Nifty. This was obviously in response to the aggressive guidance given by Infosys.

But it looks like the markets haven't yet factored in the full extent of Infy's EPS revision (refer to previous story), which means the buying into the tech sector could continue going forward.

There are other reasons for this: Infy has said that the backlash against outsourcing has quietened, pricing continues to be stable, and the external environment in general has eased.

In addition, the rupee has been appreciating, which added 60 basis points to Infy's operating margin last quarter. All this augurs well for the whole IT sector.

Interestingly, at the beginning of April, FIIs were only marginally overweight and mutual funds were underweight on the sector. IT stocks have done well since then, which means they would now have a higher allocation in portfolios, but there could be room for a further increase.

One of the reasons is the dearth of better options. The deficient rainfall so far this year could make things worse for the manufacturing sector, which is already reeling from higher commodity and oil prices.

Not to mention that there would be no boost to earnings this year due to a cut in interest cost, as much of the refinancing has already been done and yields now rule higher.

Centurion Bank bounces back

Centurion Bank's return to profit in the June quarter is the logical culmination of the efforts put in by its new management team.

The changes include cleaning up the balance sheet, with net NPAs likely to fall below 3 per cent by next March; increasing capital-a 2:5 rights issue will pump in capital; improving staff performance-new blood has been brought in and a system of variable compensation put in place; and an emphasis on low-cost deposits has led to a sharp rise in current account and savings bank deposits, bringing down cost.

One advantage is that it's already a retail bank, with retail advances forming 86 per cent of the portfolio. Its strength lies in two-wheeler loans, which enjoy a high margin. Spread has been a high 3.7 per cent. At the same time, 100 per cent provisions are made for two-wheeler NPAs in nine months.

Growth in the first quarter has been at an annualised rate of 50 per cent, and it's likely that much of that business growth will show up in topline growth as well.

A foray into mortgage finance is on the cards this year. Plans are being drawn up to increase fee income, with talks going on for becoming corporate agents for two life insurance companies.

Will higher interest rates make a difference? With average duration of investments being very low, the bank will be almost unscathed. And although the bank has higher than necessary SLR investments, they're all in seven-day repos, pending deployment in lending. In short, all the signs-faster business growth, more fee income, better HRD, lower provisions-point to a brighter future ahead.

With contributions from Mobis Philipose