5 reasons why you may be better off dumping Infosys

With a falling rupee and a slowing global economy, several opinions have been expressed about India’s IT sector. Whether the IT bellwether will stand to gain from a stronger dollar has been questioned by many who argue that it is not an arbitrage business. The company’s earnings and performance depends on the amount of business generated and not by currency play.

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Despite being bullish on the IT sector in August, Bank of America Merrill Lynch is now cautious about the sector’s outlook. However, it still maintains a ‘buy’ rating on IT stocks- TCS, Mphasis, Wipro and HCL Tech. The only exception is the bellwether stock Infosys where it has slashed its guidance to Neutral. Here are a few reasons why:

1. Infosys has surged nearly 25 percent since August and is not looking cheap anymore. Hence there is no short-term trigger for the stock and the upside is limited.

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2. Secondly, the chances of doing good business are grim because of its low exposure to fast growing markets of infrastructure management services and emerging geographies like Latin America, Middle East and Asia.

3. It also has high exposure to discretionary IT spend like package implementation services and consulting, which companies could cut down on when the going gets tough.

4. The fourth quarter is seasonally week for the IT sector since the number of billing days are far less .

5. The stock also tends to be weak in the run up to its annual guidance, which will be out in April 2012 for financial year 2013. Infosys is the only company to give a guidance for earnings per share and the company could be cautious given little visibility of earnings.

In the medium term too, the company should remain in an investment phase to transform itself into gaining more market share in various products and platforms. But while this phase is on, the margins might be low and execution will be key. The research house has its target price at Rs 3,000. Infosys is currently down 1.5 percent and trading at Rs 2685.5 on the BSE.