Infosys is a good company and there is nothing wrong with it but I still don’t prefer investing into it’s stock. The problem with this stock is that the valuations are extremely over stretched. Over stretching of valuations happen when people build up too much expectations from a company but in reality companies cannot always keep delivering as per those high expectations that are built up. When the company faces any kind of problem and growth percentage comes down, people start selling the stock. That is exactly is the story of Infosys.

Due to all those expectations Infosys stock run upto 3500 odd levels and today after 6 months of touching those levels, it is trading at 2900 and still looking expensive. For the last couple of quarters, Infosys has been failing to meet the street expectations and thus the stock is failing to deliver much returns. To worsen the matter, Infosys has given a really bad guidance for FY12 which came as a shock to people and on the results day, Infosys fell more than 10% and another 2-3% the next day. The reason of such a big fall was more to do with overstretched valuations than the bad news.

Let me give a brief idea about its valuations. Infosys posted an EPS of 119.4 which relates to a current P/E of 24.36. FY12 EPS is estimated to be at 140 (doubtful) and that relates to a P/E of almost 21. By chance Infosys fails to meet these expectations, the P/E will move above 21. Assuming the P/E of one year forward earnings to be around 21-22, it really looks expensive, specially for a company that is failing to grow at the required rate to keep it trading at higher valuations. Remember Infosys guidance is about EPS of 128 and expected EPS is 140, it is a big difference, so Infosys might again fail to deliver as per expectations and that will bring further fall in the stock, even from current levels.

My question is, why would anyone would want to buy Infosys at such high valuations when there are other stocks available at cheaper valuations and doing much better than Infosys? Like HCL Technologies. Or why would people not buy TCS which has been delivering as per expectations and is trading around same valuations as Infosys. Personally, I’ll go and buy HCL immediately.

I believe there is very limited upside in Infosys unless it beats market expectations in FY12. For now the stock can rally upto 3000 but it will see selling at those levels. And if markets do fall down, Infosys might be one of the leaders in the fall. Infosys might see some buying around 2800 levels as a bottom picking strategy but a good correction in market can take Infosys to 2500 levels also. Watch out for Q1 FY12 earnings, that will decide if infosys has to fall further or go up from current levels. Till then, I don’t see much to do in Infosys. My advice to investors would be switch over to HCL Technologies as that company has been delivering really good results every quarter and their management is also confident about maintaining good margins and profit growth ahead.

No related posts.