Market Watch: The Infosys crystal ball

In difficult market conditions investors often gravitate to blue chips that may have modest growth ahead but reasonable certainty of cash flows. Writes Udayan Mukherjee.

Today is arguably the most important annual day for the information technology calendar. Infosys, the infotech bellwether that gives specific annual guidance, will set the bar for 2009. Its recent stock price performance reflects some hope in the run-up to this critical event. Infosys is up 7 per cent in the last fortnight and about 17 per cent above its 2008 low of Rs 1,220-odd. There is an expectation that the stock's stark underperformance relative to the market is nearing an end.

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The backdrop has changed a bit. The rupee's one way upward march against the dollar has been arrested. The gaining view now is that while the longer-term call is still of a stronger rupee, it may hover around 40 to a dollar or even depreciate a bit in the near term. To counter this tailwind, US conditions have worsened significantly and there is more uncertainty in the air. Infosys is likely to end 2007-08 with an EPS of around Rs 81, up 17 per cent over the previous year. On this base, given the environment, it could choose to be ultra-conservative and guide for Rs91 in 2008-09, expected growth of only around 12 per cent. Or if it wants to sound a bit less circumspect, it may say Rs 92, which works out to around 13.5 per cent. Rs 92 is actually a reasonable base case, which, if delivered, should not lead to any major sell-off. I doubt if it will spark off any big rally either as the stock would then trade at just under 16 times 2008-09 guided earnings. Not expensive, neither cheap for a company growing at 13-14 per cent. It is important to remember that this is not the old Infosys, which beats its guidance by a huge margin; in fact, this year it has struggled to even deliver on the guidance held out at the start of the financial year. So a price of Rs 1,600, assuming a PE of 17.5 on the base case EPS, seems like a fair price to me. That is not a whole lot of upside from where we are. Anything more would need earnings surprises from the company. Any guidance above Rs 93 will make the street happy.

Fact of the matter is that Infosys is no longer the powerful growth engine it used to be. However, it could be a good bear market stock.

In difficult market conditions investors often gravitate to blue chips that may have modest growth ahead but reasonable certainty of cash flows and top quality management. Infy fits the bill. So, as it has in 2008, it may outperform a weak market. But, whenever the bull market resumes, you may do well to jump ship. For today, pray that Infy does not guide anything under Rs 91-92 and rock the boat.