Infosys share price can fall 40%, says CLSA sales team

The timing is crucial as Infosys is slated to announce its Q2 result in the next 10 days

The share price of Infosys Ltd. came under pressure today as global equity research firm CLSA said its stock could fall 40% from the current levels in 12 months. The research firm's sales team in Hong Kong said this in a note to clients.

Stock brokers in Mumbai say, one of the clients after taking position in the counter, could have leaked the note to media and there was panic in market. The timing of the note is crucial as Infosys will announce its second quarter results in next 10 days.

The Infosys shares fell 1.17% today to close at Rs 2,578 before it touched a low of Rs 2,562 on the Bombay Stock Exchange (BSE). CLSA's morning note has fixed the price target at Rs 1,566. Indian IT services companies are aggressively going after big contracts with offshore billing rates in the $14/hour area. It looks like IT services vendors are all scrambling to build order books at any cost, the note said.

"This 'freebie' issue is interesting -- in that it is what we believed should be the first choice vs. lowering pricing because we believe that once a rate is lowered, it is much harder to raise it in the future," said CLSA sales team.

The note further added that sector multiples are likely to keep de-rating. The recent appreciation in the Indian currency might prove negative for the sector as well as for Infosys and its prices could fall. A 4% strengthening of the rupee will hurt Infosys earnings by about 5%. And a 13% move in the rupee would reduce earnings by 17%. In the first half of the year 2012, most of the Infosys earnings came from the nearly 8% rupee weakening.

The note further said that if index weightage is an indicator, Infosys could be sold by more holders and it's American Depository Receipt (ADR) can be shorted.

"Infosys has a liquid ADR while TCS does not. The only way to short sell the shares would be outside of India via an ADR, therefore, this makes it a better call for me to make. You  could always sell single stock futures domestically on this and other names as an option, it just is not as easy to do for many," salesperson said.

Earlier this year, CLSA's senior IT analyst Nimesh Joshi had written a open letter to Infosys chief executive S D Shibulal berating the company's earnings performance. Joshi, who claimed to have spoken to over 100 investors before writing the letter gave examples of founders returning to rescue struggling companies, suggesting that the retired founders of Infosys may have a role to play in putting the company back on track.

Then, the letter had addressed three concerns around actions to correct losing market share to peers, inability to accurately forecast near term growth and lack of clarity on growing cash pile.

In an email reply to Business Standard, Joshi said, "CLSA's official views are put through published notes and we have not put any official note on Infosys in last 10 days. There has been no change in CLSA official view on the stock."