Infy results unsettle marketmen

This week key indices may reflect woes of the operators and short-term players.

Market operators and their followers have been unsettled by Infosys Technologies' Q4 results and EPS guidance for the current fiscal. Analysts of a number of big brokerages, however, maintained “buy” recommendations.

Operators, who had driven up the IT stocks on higher expectations of net profit, would now perhaps require readjustment in strategy and would probably swallow significant losses. According to market intelligence, it's a saving grace that retail participation in the rotational “IT parties” in recent weeks had been minimal.

Some analysts had a premonition that the top four IT stocks may post weaker Q4 results.

Consensus prior to results had been projecting a flat to a slight decline in margins for FY12, which implied an inevitable downgrade to earnings.

Religare said on the weekend that it believed that “expectations” had been running ahead of fundamentals. It said that if margin reduction by Infosys was structural, it could put pressure on margin profile of large vendors such as TCS and Wipro. It admitted that IT stocks provided limited comfort at current valuations (P/E) of 23x on FY12E and said there could be earnings downgrade after the FY12 guidance for Infosys.

Motilal Oswal's analysts, surprised by Infosys' explicit weakness in the insurance sub-segment within BFSI and decline in its North American revenues, said: “We are assuming a lower margin decline of 150 basis points v/s management guidance of a decline of 300 basis points, though that still represents a downside relative to our prior assumption of flat margins (ex-currency). It may, however, be noted that the 150bp decline is on a lower base for FY11 driven by the 4QFY11 miss on margins.”

This resulted in an EPS downgrade, by Motilal, of 7.6 per cent from Rs 152 to Rs 140.6 (implying YoY growth of 17.7 per cent). “Assuming similar margin profile for FY13, we have downgraded our FY13 EPS estimate by 7.3 per cent to Rs 169.5 versus prior estimate of Rs 183. Keeping FY13 target P/E at 20x, our revised price target is Rs 3,400, implying an upside of 14 per cent from the current price of Rs 2,989.”

PINC expected Infosys EBIT margin to decline lower than assumed 300 basis points for FY12. But only a few in the market remembered that Infosys has some $3billion or Rs 15,000 crore cash in its books, which makes it a prized target or gives it enough muscle to gobble up a big player.

Market may this week feel the urge to price in a possible interest rate hike a little more aggressively than it allowed in the recent past. Bull operators are unlikely to jump into the ring immediately to confront a bearish psychology. However, they would have to defend their position to save their skin. The key indices would get support after a decline, it seems.

Market intelligence suggests that the tug of war is likely to give the regulator a testing time in surveillance.

jayanta_mallick@thehindu.co.in

COMMENT NOW