Infosys Disappointed Yet Again
January 12, 2012 | In: Large Cap Stocks, Stocks Analysis
The start of the earnings season has not been great at all with Infosys disappointing the street. Q3 FY12 results have been fairly okay with rupee earnings above expectations and dollar earnings in line with expectations but the future guidance which Infosys has given is clearly a disappointment. They have reduced their dollar revenue guidance than what they had suggested in the past. It was largely expected that dollar guidance will come in the lower end of the guided numbers but now future expectations are below the whole guided numbers for FY12. This clearly did not go well with the market and thus the stock has crashed close to 7% today.
I don’t get it as to why the market was getting hyper with the kind of rupee fall which was to aid to the increasing profitability from the IT companies, because the rupee numbers do not tell about the core business. Rupee numbers change as the currency changes and if rupee depreciates, rupee earnings go up and if rupee strengthens then rupee earnings for IT majors go down. Their actual core business is the dollar numbers which tells you how the company is operating at the core level. Nobody cares about the swings in rupee when talking about fundamentals of these companies as these are one time stuff. We care about their dollar revenues and the kind of guidance in terms of dollars to adjust the earnings expectations for future. I would agree that Q3 has not been bad at all, but the kind of muted performance expected by the board of Infosys, it seems that the future is not as bright as most would have thought.
The dollar guidance came in weak and the market has punished the stock severely with an almost 7% crash. Even TCS isn’t spared and there is a cut of around 4-5% on that as well. The whole CNX IT index is down 5 odd percent. People who are still holding the stock should continue to hold it but those who are looking to buy into the IT, I don’t think it is the right time yet to get into Infosys because Q4 numbers could just be more disappointing and stock might continue to consolidate.
For me, I just don’t like these large IT companies at all because the kind of valuations they trade at is simply not comforting. These act more like defensive stocks and would give you much low upsides than what several other beaten down high quality names. These stocks are good to hold but not for fresh buying as when you get the next bull market, IT would be a supporter and not a leader. The lead in the next bull run will come from the beaten down financial space, specially the banks. So buy good quality beaten down banks than high valued IT companies. The IT companies if they don’t perform as per expectations, they would get stuck in a range for a long time while the beaten down names will show strong upsides as market picks up steam.
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