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Infosys Q1 09: Tough Outlook


Infy’s results are out – well actually were out of Friday and the stock got beaten up both in India and the U.S. The stock was down 7% in India and 13% in the U.S. The USD Rupee rate was at 42.87 versus a 43.2 rate seen a day earlier.

  • EPS at 22.75. Growth was about 20%.
  • Projected EPS for the full FY is around 100. Next quarter is around 24.
  • Now this is all with the rupee at 43.04. What happens if rupee falls again? They have only $811 million as hedge (which is not even one quarter’s revenue).
  • 27% of business comes from banking and financial services. Most of this must be in US/Europe. The banks and FIs there are, pardon my french, fubared. News as of now: IndyMac goes bust, Freddie and Fannie show signs of collapse, LEH is tottering on the brink, subprime mortgage resets raising their ugly head and a credit crisis of epic proportions in progress.

    The usual first thought is that outsourcing will increase. But if there’s not enough business itself, what’s the point? Even stuff like infrastructure management for banks – like maintenance of software and hardware – is going to be impacted as banks fire employees, cut costs, and lower targets. Efficiency is not a driver now – you need transaction volume to drive efficiency.

  • Dollar EPS growth is only 16%. If we assume the dollar will go back to Rs. 40 we will end up with about that much growth on INR. Assuming Rs. 95 or so as EPS going forward, and a 16 P/E, both of which I think are a little high, we still get a price of Rs. 1,520. Compare that to current price, after the steep fall, of Rs. 1,676.
  • They have 7400 cr. in cash, but that translates to only Rs. 130 per share, and is potentially the only thing that can get them to higher growth – if they acquire, acquire, acquire. Infy’s been loathe to buy product based companies, or buy intermediaries where their revenues can be transaction based (rather than fee based). This is the time – stuff is cheap and going to get cheaper. In five years, any purchases made now will reap rewards. But you can’t keep thinking of share prices in the interim – if they’re going down, let them go down a few years; you can’t live quarter to quarter.
  • Having said that I would rather not lose money on the stock, so I’d get out if I owned any shares. After it shows the drive, and after the stock starts to rebound or even cross its last highs of 2100+, maybe then it’s worth a dekho.
  • If you think about it, other IT companies that have lesser cash should be impacted MUCH more than Infy, if they haven’t been hammered yet.

Disclosure: No positions, but we may end up taking some if our systems say so. I have very few discretionary positions on – Infy isn’t one of them – the rest are system determined and they react to prices, so I can’t predict if I will have a position.


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