Drop in Infosys stock breeds caution among fund managers

The stock is the third most owned counter by equity funds after HDFC Bank and ICICI Bank

A 20 per cent drop within a quarter in the stock price of Infosys, an information technology (IT) firm, has made equity fund managers a worried lot. The stock is the third-most owned in their schemes' portfolios and accounts for 3.2 per cent of equity assets or about Rs 13,000 crore. A total of 480 mutual fund (MF) schemes from all categories have invested in Infosys.

The stock closed on Thursday at Rs 1,024 on the BSE, against a 52-week high of Rs 1,278 in June.

The slide in its shares hasn’t yet reflected in a big way in the performance of MF schemes, compensated by the sharp rise in other stocks in their portfolios, amid market buoyancy. However, it has definitely weighed on the performance of schemes with high exposure to the stock. IT schemes have been hit badly, the only sectoral scheme with negative return over a three-month period.

Corrective measures are already being taken by fund managers, who feel the sector faces a lot of uncertainty. Thus far this financial year, overall allocation to the IT firm has been pruned by 120 basis points, from 4.43 per cent in March to 3.24 per cent in July.

"The sector has not been growing as fast as was the case in earlier years. The (annual) growth in top line (revenue) has dipped from as high as 70-80 per cent before (the year) 2000 to 12-13 per cent in recent quarters. The growth has substantially come down as these companies have grown in size. The event of Brexit (the UK vote to leave the European Union) has created a lot of uncertainty for the IT sector and probably because of that, investors are staying away from here for the time being," says Amit Nigam, equity head at Peerless MF.

A top chief investment officer, who wished not to be named, said: "Currently, there is not much value in the sector. Growth has plateaued and it is beginning to hurt the performance of schemes, being a laggard sector. Infosys, in particular, is turning out to be a pain but one should note that this company has grown on sound parameters. It has huge cash flows, a big positive. It is not advisable to exit the counter; a downward revision in allocation looks possible."

This is the not the first time Infosys is making fund managers uncomfortable. In the past three years, the stock has seen sharp gyrations of five to 10 per cent in a single trading session. However, fund managers' love for the IT bellwether company refused to die and the counter remained among the top three most owned stocks for several years.

Atul Kumar, head of equity at Quantum MF, says: "There have been some companies which are seeing a slowdown in BFSI (banking, financial services and insurance) space. BFSI is the largest contributor to the revenue of IT companies. Brexit is another factor which can impact their revenue. However, over the longer term, the sector has a lot of potential. The arbitrage between wages in India and western countries is likely to remain. On top of that, outsourcing opportunities will increase.”

HDFC Equity, HDFC Top 200, ICICI Prudential Value Discovery Fund, Birla Sun Life Frontline Equity Fund, ICICI Prudential Focused Bluechip Equity Fund and Franklin India Bluechip are among the schemes which have pumped a lot of money in Infosysy' stock. However, performance over the past three months period was satisfactory, with the quarterly return at 12 per cent.