Seeking Alpha
Oil & gas, long/short equity
Profile| Send Message|
( followers)  

Infosys Technologies (INFY) took a beating on the bourses Thursday after the company reported lackluster earnings that missed its own forecast.

The stock ended down 11% for the day on NASDAQ as revenues for the quarter ended June 30 were down 1% on a sequential basis. What spooked the markets was continued muted guidance from the management which reset its forecast for year-on-year growth to 5% from the earlier expected 8-10%.

Q1-2012

Q4-2011

Revenues

1,752

1,771

Cost of sales

1,059

1,041

Gross profit margin

39.55

40.58

Net profit

416

463

Net profit margin

23.74

26.43

Diluted EPS

0.73

0.81

In US$ million, except per EPS.

Infosys has long been India's largest software company only to be toppled recently from that position by Tata Consultancy Services. As the position of the CEO has moved from one founder to another it has had to grapple with a lot of internal restructuring under the current MD and CEO S.D. Shibulal. It also faces the toughest business environment due to the never ending European drama and a weakening US economy, both of which are principle markets for Infosys. It has had to tackle high levels of attrition as the company has refused to hike salaries till the outlook improves. Infosys, along with a lot of other companies, is expected to face political rhetoric as the election season heats up in the US. Employee costs have been higher as the company has had to increase onsite and local hiring to stem this diatribe. It also faces immense pressure to hike salaries in its centers in India as inflation has hovered higher than historical averages for an extended period of time.

The company has forecast revenues to be at least $7.343bn for the fiscal year ending March 31, 2013. It also expects EPS to be around $3.03 giving it a one year forward multiple of 12.8 based on Thursday's closing price.

In a rare coincidence, its nearest competitor Tata Consultancy Services declared its earnings on the same day and came up with much better numbers. Revenues for TCS grew 3% QoQ and 13.1% YoY as compared to Infosys's -1.1% and 4.8%.

The following table compares other companies which have sizable development centers in India:

Revenue

2010-2011 Growth

ttm P/E

52 week price change

Accenture (ACN)

18.44

14.78

-6.08%

Infosys

25.75

12.92

-28.68%

Wipro (WIT)

4.84

19.71

-33.33%

Cognizant (CTSH)

33.29

18.64

-22.55%

P/E from yahoo finance

The uncertain business scenario has affected decision making across the board and IT companies are not immune to it. So from a strategic point of view one may still remain a buyer in IT, but tactically, it makes sense to remain underweight in Infosys.

Source: Is Infosys Technologies Losing Its Charm?