Market View: Infosys share price will remain subdued

A company growing at 8% does not merit a high valuation

Infosys has disappointed once again with its quarterly and what’s more shocking is its depressing guidance for 2012-13. While there were expectations that Infosys would stop issuing guidance, that it has provided one is reassuring. The Infosys management has, in fact, said that coming out with guidance during such uncertain times is a bold step in itself. However, its guidance of 8-10 per cent for FY13 is much lower than Nasscom’s industry growth figure of 11-14 per cent.

The Infosys stock reacted to the news by opening nearly 10 per cent lower, and has been trading around those levels. Its result (read Result Analysis: Infosys falls from grace) has pulled down the entire sector which trades nearly 6 per cent lower than Thursday’s close. For those who are still holding on to the shares, there is some respite that in case of a fall, the Infy share price generally reacts the most on the day of the results going by history. Prices hover around the same levels over the following week (as seen in the table).

Being a bellwether stock, market expectations were that the company would do far better than the industry. The market views Infosys differently when compared to other listed companies, not only form the IT space but across the sectors. Infosys has been a pioneer in setting high standards of transparency and corporate governance in the Indian market. It is these virtues which are now being questioned by the market.

A series of re-rating can be expected from analysts. A company growing at 8 per cent does not deserve high valuation, transparency or no transparency. The market is willing to extend a premium to any company that shows growth. Money chases performances, and it will again chase Infosys, provided it gets its act together.

Irrespective of the fact that 65 out of the 70 analysts covering the stock either have a ‘Buy’ or a ‘Hold’ recommendation on the company, the stock price will only follow where the earnings take it. And currently it is taking it downhill.