It's business as usual at Infy
Typically, the stock drifts up to trade at 30 times trailing earnings by the end of a financial year, writes Udayan Mukherjee.india Updated: Apr 22, 2007 17:29 IST
Infosys didn't upset the applecart with it's FY08 guidance and the market heaved a sigh of relief. To be sure, the Q4 results were dissapointing & the earnings-per-share guidance of 81 rupees wasn't hugely aggressive but to expect that in the current environment would have been optimistic.
It was solid, though. The management appeared relaxed and confident and one would be very surprised if they did not go on to beat this guidance by a wide margin. Like they did in FY07.
This has implications for the entire IT sector which has been underperforming on fears of a US-led slowdown in earnings growth. Infosys should not find it too difficult to deliver 30-odd per cent earnings growth this year. Typically, the stock drifts up to trade at 30 times trailing earnings by the end of a financial year. If they do report between 85 and 87 rupees in EPS then the stock should move to around 2600 in the next 12 months.
That's a 25 per cent appreciation from current levels and should be good enough for most investors. It may no longer be the most exciting stock but "stable and boring" is good in an uncertain equity environment. For a long term investor, what's wrong with a 20-25 per cent tax free return in any case?
For the more adventurous though, the Infy guidance puts the spotlight back on midcap IT. If the US slowdown does not present any major threat to IT earnings, then it may be time to examine valuations in many of the fast growing midcap tech stocks, particularly the ones which have corrected by 25 per cent or so from recent highs.
There is more valuation comfort there and some of the niche plays may even grow faster on their relatively smaller bases. More risk, but maybe better returns. Finally, it's good to note that in this environment of flux, at least one sector, that too with a 20 per cent Sensex weightage, now has low probability of surprising on the downside.