Feb 22, 2001|
Infosys: Paranoia strikes
On the 20th of February, Infy fell below Rs 6,000. Intra day it had reached to Rs 5,900 before recovering and finally closing at 5,925. The question is what happened all of a sudden. Did the fundamentals change? Though we must take into consideration that for quite sometime there has been uneasiness in the market about the performance of the technology sector due to a slowdown in the US. And to add to this there were some particular concerns about Infosys, with one of its clients Nortel posting losses.
First of all let us look at the issue of the US economic slowdown. The situation is still not clear. But one thing is for certain. Software companies are witnessing a slowdown in business. But the reason behind this is that the US clients are adopting a cautious approach till they get clear signals as to which way the economy is heading. The situation will become clear in some time to come (after the rate cut takes effect).
Considering that the size of IT spend in the US was about US$ 300 bn in FY01 and assume it does not grow at all and software accounts for 20% of the IT spend. Then the total US market comes to around US $ 60 bn. Infy’s revenues for FY01 are estimated to be US$ 379 m (US$ 0.3 bn) and for FY02 (at a 100% growth rate) it would be US $ 0.6 bn. These translate to be 0.5% and 1% of the total US markets. A conservative estimate is that the IT spend will grow at least by 5% in FY02. Another factor in favour of Infosys is that it has already an established brand name in the United States and with offshore capabilities it just might see an increase in business. The companies also might reduce the number of vendors and give the existing ones more business to cut costs and work more closely.
Coming down to Nortel, which employs about 76,000 people. That is about 9 times that size of Infosys. Nortel’s revenue’s worldwide were US$ 8 bn. It had an operating margin of about 9% not considering expenses like amortisation of goodwill and stock compensation from acquisitions and divestures. Considering Infosys has only 3 clients that contribute more than 5% to its earnings. If Nortel is to be one of them the contribution would be around US$ 15 m. That is 0.17% of Nortel’s earnings. Nortel’s R&D expenses have seen a 590% jump YoY. This is an indication of the company’s commitment to R&D. Infy and Nortel are to set up a wireless centre of excellence in Bangalore. It is very unlikely that Nortel is going to decrease business in this area. It may however consider reworking the billing rates, and this is what is worrying the markets.
We are not saying that Infy will be isolated in case of a slowdown. It will be impacted. But the impact is likely to be less than what the market seems to be expecting.
It seems that there is paranoia about tech stocks. It was because of the unrealistic valuation to tech companies seen last year. But were fundamentals even looked at then? If yes that would pose a serious question considering valuations certain companies got. They say ‘Cash is king’ and a ‘Rupee today is worth much more than a rupee tomorrow’. Infosys with a brilliant performance and management is a perfect example. Then why the paranoia?
More Views on News
Aug 2, 2017
A better than expected turnaround in performance results in a change in view.
Jul 27, 2017
Digital services drive growth for Wipro in 1QFY18.
Jul 14, 2017
Infosys starts FY18 on an encouraging note with a stable performance.
Jul 14, 2017
TCS starts FY18 decently despite an adverse currency impact.
Jun 29, 2017
Volvo partnership caps a good year for HCL Technologies.
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 16, 2017
The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407