By Priya Nigam
India’s IT services and BPO sector has burgeoned into a $40-billion industry, backed by a thriving US economy. The US contributes about 60% of the revenues for this industry and, with the US now struggling, there is widespread concern over how well this industry can manage to stay afloat. IT firms that export to the US have not only been hit by the downturn in demand, but also by the plummeting dollar. Bearish sentiments triggered by these factors have been maintaining constant pressure on the Sensex.
Infosys Technologies, India's second-largest exporter of software services, had reported slightly disappointing results for the seasonally weak third quarter. The market is now eagerly awaiting the fourth quarter results. The company has guided to revenues of between Rs4,477 crore and Rs4,501 crore for the quarter ended March 2008. This represents 4.8% - 5.4% growth. Market expectations are for a slightly higher 6% growth in revenues. The guidance for EPS is at Rs21.38, or 5.3% growth. In comparison, rival Tata Consultancy Services and Wipro are expected to report similar revenue growth, but lower net profit growth for the quarter.
Infosys will likely meet the market expectations for the fourth quarter. It would not be surprising, however, to see the company announce disappointing guidance for fiscal 2009. CNBC-TV18 quoted Bhavin Shah of JP Morgan as saying in an interview, “We think they (Infosys) will guide to somewhere around Rs91-92 per share (the current EPS is at Rs94.80) and anything above Rs90 is good enough in terms of expectations and where they are, it should not show any disappointment. We are expecting them to guide to about 17% EPS growth in rupee terms.” JP Morgan has a Rs1,875 price target for Infosys.
Investors are hard to impress these days and it would take a lot for Infosys to really amaze the market and witness a surge in its share price. This is because the market is overly cautious due to fears of a US recession as well as record inflation in the domestic market. Moreover, the company’s PEG has crossed 1, which is not a very good sign for investors.
Trading significantly below their 52-week high, the company’s shares are already feeling the heat. With the share price having declined by about 19% over the last three months, the market has already accounted for the challenging environment. So, it may seem that a good earnings report by Infosys will boost shares. However, I doubt this. Since the concerns that are exerting pressure on the shares are not company specific, even a good earnings report may not do much to push the stock higher. The stock market as a whole is likely to exhibit inflation-related concerns at least in the near term. This situation, however, creates a good opportunity (for the brave-hearted!) to buy the shares of a healthy company at a reasonably good price.
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