Infosys revenue guidance a shocker, stock deserves de-rating

Extreme disappointment. That’s how investors reacted to Infosys’ fourth-quarter results and, more importantly, its guidance for the current financial year. As a result, they pounded the tech giant’s shares in opening trades,which tumbled below Rs 2,500 a share.

The company’s guidance for 2012-13 (FY13) greatly upset investors. Infosys announced a dollar revenue guidance of 8-10 percent, which was much lower than industry body Nasscom’s estimate of 11-14 percent for the industry.

[caption id=“attachment_274727” align=“alignleft” width=“380” caption=“Friday, 13 April, turned out to be very unlucky for Infosys. Reuters”] [/caption]

The company posted a 2.4 percent quarter-on-quarter drop in the fourth-quarter (January-March 2012) net profit to Rs 2,316 crore.Revenues also declined 4.8 percent to Rs 8,852 crore in the same period.

The tech giant had earlier indicated there would be no revenue growth in the fourth quarter. Dollar earnings per share (EPS) of $0.81 matched the company’s earlier guidance.

Given that one of the biggest companies in the Indian IT space has lowered its revenue guidance, there’s a very good chance Nasscom will be forced to lower its guidance as well.

The disappointing guidance flies in the face of market expectations. Most brokerages had been relatively upbeat in their expectations before the results.In its results preview, Nomura said that Infosys’ results would have a major ‘positive effect’ on the sector as it expected the company to offer a guidance of more than 12 percent and EPS in excess of Rs 168 at the lower end (Infosys’ actual EPS guidance is Rs 161 at the higher end).

The brokerage had also forecast Infosys’ the current quarter’s revenue growth at more than 3 percent; in contrast, Infosys gave a guidance of 0-1 percent.

Clearly, Nomura is going to feel deeply let down. It won’t be the only one.Even Deutsche bank estimated an EPS guidance of Rs 169-175 for the next year and predicted that Infosys would outperform its peers in the short term. In fact, it went to say that Infosys deserved to be re-rated _higher_to a price-earnings (P/E) multiple (a measure of a stock’s valuation) of 18 (the P/E has hovered around 17 in recent times.)

That may not happen either. In fact, what is likely to happen will be the exact opposite. For a company that aims to grow revenues at just 0-1 percent in the current quarter and below industry estimates for the entire financial year, it is in no position to command premium share valuations, which the stock has so far done.

At the current price of Rs 2,499, the share’s P/E multiple comes to 15.5. Chances are, the stock will fall in line with declining financial performance expectations from the company. There will also be implications for the rest of the technology sector, as investors will be more likely to shun IT stocks for a while now.

JP Morgan has maintained a price target of Rs 2,900 for the stock though it admitted that the company had many big misses on various accounts. IIFL told CNBC TV 18, the EPS estimates could go down by upto 10 percent giving a target price of Rs 2,400-2,500.

Friday, 13 April, turned out to be very unlucky for Infosys.