Market Watch: Stock market sceptical, Infy confident
Infosys may not have held out its 2008-09 guidance yet but there is no panic in the voice of the management. This is important as by this time the Infy top team would have interacted with large IT spenders and got a sense of the drift for 2008. You could accuse the management of being in denial but not of hiding the truth. This is not a management that fibs. When they think the news is bad they share it with investors, upfront. Right now, it seems they genuinely believe things are not as bad as the market thinks. Of course, they could be wrong.
It seems the market is in no tearing rush to get into Infosys yet. In difficult environments, the market generally does not set much store by what managements think as their vested interest often clouds the ability to forecast a business outlook objectively and accurately. The Infosys price movement suggests investors do not think the time or price is right to get into IT. The April guidance may set the tone for the year but from what I heard from the management yesterday, it should not be ultra-conservative. The trick is to see what the revenue guidance is as Infosys has done a sterling job of maintaining operating margins this year. Unless there is havoc on the currency, they should be able to hold a 30 per cent plus margin profile in 2008-09 , which is good. So, unless they stumble on volume growth, they should be okay for next year and go onto report between Rs 96 and Rs 98 in EPS. A modest PE multiple of 20 over the next four quarters implies a price of around Rs 1,950.
Not beyond the realm of possibility.
Now whether this scenario plays out or not depends on many things, including the rupee. It cannot be taken for granted as the market's fears are perfectly legitimate, the management's confidence notwithstanding. A case can be made out for 2008 being a better year for IT stocks than 2007 was, but we all know how long underperformance can continue once a sector falls out of favour. Something will have to happen to change the sentiment, till then Infosys may grind in a range of Rs 1,500-1,800; there was nothing in this quarter's numbers to spark off a dramatic recovery. We wait.