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Tech: Time to pick?

Jun 19, 2002

The technology sector has been out of favour with the markets for quite sometime now. Considering the uncertainty regarding economic recovery in the US, it unlikely that the sector will have many takers. But old stock market wisdom suggests looking at sectors that are currently neglected by the markets. There might be some value picks. So what has technology sector got to offer?Infosys. While Equitymaster.com as a matter of policy does not recommend stocks, what we are suggesting is that you evaluate the stock for your portfolio based on all the information available. To assist you to make the decision we have research reports on our site that give reasons to buy and reasons not to buy a particular stock.

We have recently updated the research report on Infosys. The positives for the stock are quite apparent. The list includes the team and the brand the company has built over the years and of course, its size. Infosys is the second largest software exporter in the country. Larger corporates from the west would prefer to outsource important contracts to the larger companies, as business continuity of the vendors is must. This is due to the fact that the projects take a considerable period of time to complete. The reasons to buy also look at areas that would be growth drivers in the future.

Reasons not to buy are predominantly centered on the exposure to the US markets. Also, cash of about Rs 7,700 m in the balance sheet is hurting the company RoE. While Infosys has been one of the best software companies, its investments in the past are nothing to be proud about. The company has written off Rs 223 m (US$ 5 m) towards investments in Yantra Corporation, EC Cubed and Alpha Thinx Mobile Services. As on 31st March 2002, Infosys had investments to the tune of Rs 444 m (US$ 9 m). Another concern is the changing structure of the IT services market place.

The research report is supported by three years of forward projections for Infosys’ financials. At the current market price of Rs 3,295 the stock is trading at a P/E multiple of 23x its FY03E annualised earnings. Thus, the markets are factoring in a 23% growth in net profits in the future. This is marginally ahead of the company’s guidance. However, at present the stock is trading a much lower valuation compared to the earnings in FY05E that too not considering a recovery in the US economy and revenues from Progeon.

Infosys research report

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