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INFY: Fall from grace

Dec 27, 2000

It finally happened. The maharaja of all tech stocks, which till date never had a recommendation other than ‘Buy’, was downgraded to ‘Hold’. All hell broke loose on the Indian bourses. Of course, the apprehensions in the technology sector are a consequence of industry leaders issuing profit warnings, including Microsoft. If we look at what has happened at NASDAQ over the year, an interesting story emerges. The companies that had something tangible to sell like products or software services like IBM, SAP, Wipro and Infosys and had corporate clients are more in favour. In it’s peer group Infosys has been doing quite well. Comparatively, those, which targeted the individual consumer and were more into content, have lost investors’ interest. These include Amazon, Yahoo and Rediff. One thing is for sure: valuations have become more realistic.

Source: Quicken.com

Infosys has shown high growth rates (98% in FY99 and 70% in FY00) in the past and the expectations are that it will continue to do so. So what is stopping it? The major fear is the slowdown of the US economy. What will be the impact? There are two schools of thought. One says that the companies will cut down on IT spend to sustain bottomlines and the other says that the share of Indian companies of the total US market is so insignificant that it won’t matter.

According to Morgan Stanley Dean Witter’s annual survey of IT spending at large US companies, 74% of the companies in the survey had not made any changes in IT spend for the next year in the wake of economic slowdown.

The survey indicated that databases and e-business would be the top contenders for increased spending. The companies would invest in those areas that would directly impact their bottomlines. The focus would be on areas like supply chain management. Considering all this, the impact, if any, on Infosys would be minimal.

About 30% of the revenues for Infosys in 1QFY01 were from e-business, an area that is not going to be affected. Also, Infosys is getting into technology intensive areas like communications software this would fetch higher billing rates. Infosys is diversifying geographically into markets like Japan and Africa that have huge potential.

Therefore, there seems to be no immediate reason for a downgrade. If there is one, the other question that would arise is that why Infosys was a buy at prices higher to this?

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