Infosys Earnings Preview

The Indian markets have been hammered for the last three sessions, with the Sensex trading down 3.7 % since the beginning of the week. The bulls are licking their wounds and hoping for a rescue from Infosys (INFY) which reports tomorrow.

The rupee's recent strength and its negative impact on INFY's earnings, which are mostly export-driven, have been incessantly flaunted by the bears and skeptics alike. This and a host of other reasons have caused INFY to give up as much as 6.76 % from its highs of last week. Most traders attribute the selling to booking of profits in the stock ahead of earnings, as it has risen by more than 87 % from its May 2006 lows,when the whole market took a beating.

BSE SENSEX vs INFOSYS FOR THE LAST WEEK

The perennial bulls on the stock argue that the dip in the stock price and any more to come following the earnings will be historical moments to buy into INFY for the future. Why? They say the company is on a new growth track in its history, with its recent moves up the IT value chain into the high end consulting space. There has also been recent wide acceptance and acclaim of its banking software product, Finacle, among domestic and international banks around the world.

INFY and the other IT majors such as TCS and Satyam (SAY) have made aggressive inroads into new countries, bagging new clients and setting up new global delivery centres, thus reducing their dependence on US dollar earnings. Wage pressures will be more than compensated by the higher billing being allowed by existing clients as they get comfortable with the outsourcing concept and its ability to allow client companies to focus on what they do best.

As for a slowdown in the US economy and its resultant pressures on dependent companies, they argue that it will be a win-win for Infosys as shrinking margins, sales and cost pressures will send more work towards the Indian IT sector. Their final argument rests on the assumption that INFY has always under-promised and over-delivered.

Look for a positive report and future guidance to lift the markets while anything less than great on the earnings front will lead to a rush for the exits. But let me end with a last bullish dissent from market observers, who point out that with the markets and INFY already having weathered a major sell off in the last couple of days, disappointments, if any, are already baked into the stock and an overall bounce could be seen, no matter what.

Fasten your seatbelts!

Disclosure: Author hold positions in the above mentioned stocks on behalf of his clients in their investment portfolios.

Comments

[mahesh reddy:]

I think...the bulls argument of more work coming to infy... come on , the work which is coming to india is the work of new development, which the companies use to facilitate their new product introduction. when there is a recession, the companies will cut back on new products and thus no new development to outsource.... thus every one faces the same downturn...if there is a recession in usa.

2007 Jan 11 01:07 AM