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Infosys: The culprit?

Apr 12, 2003

The week’s activity was mired by the full year financial results from the technology heavyweight, Infosys. The company’s guidance for FY04 was significantly lower than market expectations and therefore, the stock took a severe beating on the bourses (lost 39% during the week). Subsequently, there was intense selling pressure in other tech stocks as well. The Sensex and the Nifty shed 5.4% and 6.6% respectively. With the coalition forces gaining ground swiftly in Iraq, bourses heaved a sigh of relief and opened on a positive note on Monday. As the day’s trading progressed, the markets consolidated their gains. The key gainers in Monday’s trading included Arvind Mills. With denim demand back in favour with the top international fashion houses, prices have followed suit. It is estimated that prices are currently at Rs 115 per kg as against around Rs 105 levels at the start of FY03. Arvind Mills, with a large-scale capacity, is likely to benefit. The stock was up 6.6% during the week’s trading. Also among gainers, on Monday, was HCL Technologies. The company bagged a part of the US$ 160 m (Rs 7.7 bn) BPO (business process outsourcing) contract from British Telecom (BT). The contract that is to be executed over a period of five years is among the largest contracts ever bagged by the Indian IT enabled services industry for BPO services. The other company to bag a part of this contract was Progeon, Infosys’ ITES subsidiary. However, on Tuesday, the bourses shed almost all the gains accumulated in Monday’s trading.

Top five gainers over the week : BSE 'A' Group
COMPANY Price on Apr 04 (Rs)Price on Apr 11 (Rs)%CHANGE52-WEEK H/L (Rs)
Sensex 3,1682,998-5.4%3,533 / 2,828
Nifty 1,017950-6.6%1,153 / 920
HFCL 151929.2%77 / 11
Sesa Goa 667614.9%124 / 54
EIH 101112.6%16 / 7
Shree Rama Multitech6612.3%37 / 4
Lupin1381519.0%178 / 90

With coalition forces close to capturing Baghdad, the investors in the US turned their attention to the economic numbers. With numbers turning out to be a disappointment, the bourses in the US witnessed selling pressure. This hurt sentiment towards technology stocks in the domestic markets. The selling continued on Wednesday and the Sensex shed 27 points. The key culprit for the losses on Wednesday was HLL. The stock was down 3% and closed at Rs 144, a new 52-week low. In hindsight, the fall on Wednesday was a calm before a storm.

Mphasis BFL that declared its 4QFY03 and FY03 numbers was among the top gainers on Wednesday. For the full year, on a consolidated basis, earnings jumped by over 64%, while its revenues grew by 37% during the same period. This was on the back of a 16% increase in revenues from the services business and steep 298% revenues growth in the ITES business.

For FY04, the company estimates the group's revenues to grow between 30%-35%, while its bottomline should grow around 40%-45%. Revenues from the ITES business are expected to grow by 100%. While the topline numbers seem quite achievable, the key issue is margins. For its call center business, MsourcE, the company is positive of its achieving break even in the near future. The stock is trading at a P/E of 11x our estimated FY04 consolidated earnings. We expect the company to show improvement in its earnings from MsourcE.

On the same day but after the closing bell, Mastek, the darling of the bourses for the past year or so, also came out with its numbers for 3QFY03. Mastek posted a lackluster performance. The company’s net profits grew 2% sequentially during the quarter. However, on the back of a lower interest costs and higher taxes the company posted a marginally 1% decline in operating profits. The company also lowered its revenue guidance from 43% to 48% that it indicated earlier to around 26% to 30%. The net profit for FY03 is now expected to grow between 30%-40% as against an earlier guidance of 67%-78%. The management cited lower ramp up in business from existing clients, reduction in order sizes and postponement of projects as reasons for lowering the revenue guidance.

Top losers over the week : BSE 'A' Group
COMPANY Price on Apr 04 (Rs)Price on Apr 11 (Rs)%CHANGE52-WEEK H/L (Rs)
Mastek 554305-45.0%615 / 257
Infosys4,3002,618-39.1%4,873 / 2,420
Wipro1,293929-28.1%1,875 / 900
Silverline86-22.7%53 / 6
Satyam187145-22.6%292 / 127

Thursday was the black day for technology stocks. Mastek was battered (down 50% in a single day). However, what took the wind out of the bourses (Sensex down 105 points) was a 12% earning guidance for FY04 by the technology major, Infosys. The stock closed down by 27%. Infosys posted a 1% sequential growth in net profits for 4QFY03. This was line with the guidance given by the company. However, on the revenue front, the company has beaten its own guidance and managed to meet market expectations with a 6% sequential growth. For FY03, the company posted a 39% growth in earnings and a 19% rise in net profits.

As far as FY03 is concerned, the company not only delivered on what it had committed earlier but also consolidated its presence in areas that promises growth. Markets are nervous about the company’s guidance for FY04. But this comes at a time when there is a lot of uncertainty in the global economic environment. While it is extremely difficult to predict the turnaround, when it happens, companies like Infosys are likely to benefit. Thus, investors could look at investing in the stock from a long-term (three to five year) perspective. For those holding the stock, there is no need to panic. The reaction on the bourses is not a credible source for judging the future growth prospects for quality of a company.


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