Infosys’s FY09 guidance may not be spectacular but it certainly comes as a relief to the market. It could easily have been worse. What it does is perhaps put a floor in place for the stock. Given its 15 per cent EPS growth guidance the stock should not trade significantly below 15 times FY09 earnings, and the stock then should find valuation support at around the 1,400 mark.
Of course, if the market sells off, everything will but all other things being equal, Infy shouldn’t plunge below this price level easily.
The upside is a bit trickier to predict. Given the uncertainties of the environment and the fact that a long-term flat to depreciating rupee cannot be taken for granted, the market maybe a bit reluctant to significantly re-rate the stock upward. To me, 1,700 seems like the extent of the upside for the foreseeable future. At that price, Infosys would trade at 18 times an expected EPS of 95 for this year. That should be enough for a company growing its earnings by around 15 per cent.
Seventeen hundred would still work out to an appreciation of 12 per cent, which cannot be scoffed at in this market environment. More importantly, the downside appears limited from here, something which a lot of large investors may derive comfort from. A 5 per cent downside versus 15 per cent upside, on valuations, is a trade that should be good to take in this market.
So, as I wrote yesterday, if the year remains a difficult one for equities, Infosys, particularly after this guidance, may not be a terrible place to be. Is the worst over for the sector? Perhaps yes, for the near term. Can it become a bull market leader? I doubt it. I think Infy is now a modest growth, modest return stock which will only be sought after when markets are unexciting. For the bull market to resume, sectors like infrastructure and financials need to lead again.
Infosys may not add to the market’s woes any further but may no longer be potent enough to lead it out of the woods.
(Udayan Mukherjee is an Executive Editor, CNBC-TV18)