Infy tumbes on poor guidance

For investors used to seeing positive surprises in the financial results of Infosys Technologies quarter after quarter, a performance that was merely in line with expectations and a sober guidance came as a disappointment, analysts said.

The stock was beaten down 7% on BSE on Thursday as traders liquidated the positions built up over the past two weeks, when it had rallied up nearly 13% on buoyant sentiment.

“The market had worked up a lot of expectation which got diluted today,” an analyst with a Mumbai brokerage said. “The mood could spill over to Friday and the selling pressure continue in the short-term, but the outlook is not all that bad,” he added.

Infosys has projected a consolidated revenue growth of 34.5-35% for the full year, which is superior to the average industry growth rate, analysts said. “If the demand-supply situation was turning adverse, they would not have seen a 1.9% rise in rates. So when one begins to objectively study the numbers and listen to what the management has to say, it is clear that the business environment is favourable, despite Re levels.”

Analysts said Infy has met market expectations in its Q2 performance, but the market had hoped for a significant increase in guidance and fresh optimism on future profitability.

One analyst said investors had expected Infosys to add as many as 7,000 people during the July-September quarter and interpreted a net addition of 4,500 as a cautious move. The company’s explanation that the expansion of its Mysore campus had been delayed and hiring held up by a month failed to cheer up investors.

While the impact of an appreciating rupee has been well debated, the visible hit taken by the company and its statement that operating profit margins could slip by as much as 100 bps for the fiscal year were also factored in.

“Operating profit margins had expanded for the quarter, but the pressures remain in terms of how the US market is going to move and whether the rupee will be stable at least at these levels,” a market watcher said.

Concern over whether the subprime credit defaults in the US would have a cascading effect on its economy and subsequently, technology spending by companies, has dominated sentiment for IT stocks in recent months. Infosys results, the first major one in this earnings season, did not suggest anything that would justify that concern.

“But it is too early to say if the US subprime crisis has blown over. We have to wait to see what happens in the next quarter... If there is any impact, it will only be in the fourth quarter or in the first quarter of FY09. The volumes are a little weak but for the full year they have increased their hiring target — so I don’t see any concerns there,” another analyst said.