The information technology bulls did not have much to take away from Infosys this quarter. While higher than expected forex gains cushioned first-quarter earnings, Infosys did reduce its full year rupee earnings per share guidance by about 3 per cent. Not entirely unexpected but even so, coming as it does from a company that has never quite fallen short of delivered guidance, it does have a sentimental impact.
The message from the first quarter is clear: business is strong but swimming against the currency is tough. For the market, Infosys essentially becomes a rupee call now. That need not have been the case if valuations were low. They are not. Infosys says it will deliver around Rs 78 in earnings per share this year, implying an annual earnings growth of under 20 per cent in rupee terms. Let us assume it actually delivers 80-odd rupees. Even so, at around Rs 2,000 it is already trading at a multiple of 25 times. Assuming that Infy delivers 20 per cent growth next year it would end 2008-09 at Rs 96; on that the price-earnings ratio works out to 21 times. One could argue that these valuations are fair for the expected growth profile. From here on, unless the rupee depreciates, it is tough to build a case for a price above Rs 2,200 for Infosys. That is a mere 10 per cent upside from here.
Infosys is a great company with a terrific management; there is no disputing that. Even so, it is getting increasingly difficult to build a case for big outperformance from this stock. That too without assuming any major appreciation in the rupee from here on. If over the next couple of years the rupee hits 35 to the dollar, who knows what the margin picture could look like. Sure, it is a stock that institutional investors may find hard to ignore. For individual investors seeking outperformance though, one can think of sectors with better growth profiles and more reasonable valuations. It is one thing to admire a company's management and delivery capabilities, quite another to expect significant stock outperformance in a tough currency environment.
(The writer is Executive Editor, CNBC-TV 18)