Infosys: Caution's the watchword

Infosys should continue to trade at a premium to the market even though it has scaled down the earnings guidance for this year.

It’s disappointing that Infosys has scaled down its rupee earnings guidance for 2009-10 by about 5 per cent to between Rs 95-96 per share from Rs101 per share. The management says it’s taking into account volatile currencies and also pencilling in higher tax rate of 20 per cent. It’s not surprising that a conservative Infosys management wants to be extra cautious given that recent market data from the US suggests the environment remains challenging.

So even though the June 2009 quarter numbers were strong — a drop in volumes of just one per cent and a higher operating profit margin (opm) of 34.1 per cent despite a sequential fall in revenues of 2. 9 per cent — it could probably be the best quarter this year. The opm has increased sequentially by about 50 basis points against an expected fall of 200 basis points because the company has had to postpone some investments in people. Infosys now says the fall in the OPM for 2009-10, earlier estimated at 300 basis points will now be a much smaller 150 basis points. It’s creditable that the company will still end this year with an opm of 31.5 per cent, just 170 basis points lower than last year’s opm of 33.2 per cent.

That the dollar revenue and earnings guidance, for the current year, have been upped a wee bit, both at the lower end — revenues are now pegged at $4.45 -$4.52 billion( a fall of 4.6-3.1 per cent over 2008-09 ) and earnings at $1.97-$2 per share ( a fall of 12.4-11.1 per cent over 2008-09), indicates that Infosys isn’t expecting the business to worse. But neither is it factoring in any meaningful recovery in the marketplace before March next year. As the management points out, pricing continues to be an issue — in constant currency terms, pricing is actually down in the June 2009 quarter — and it will be volumes that will drive revenues.

At Rs 1,726, Infosys trades at nearly 18 times 2009-10 earnings while the market trades at 16 times. Although rupee earnings will fall this year, the stock should continue to attract a premium to the market. That’s because while the earnings for 2009-10 may drag down the compounded annual growth rate for the period between 2009 and 2011, the CAGR for 2010-12 should be much higher 13-14 per cent. Infosys trades close to16 times 2010-11 estimated earnings whereas the market, at 13,504, trades at just under 13.5 times.