Infy stk looks attractive over next 2 yrs: JP Morgan

 Q: Infosys is down 13-14% in two days, is the market over reacting?

A: Yes it seems that way. I don’t know what the market didn’t like. Uncertainty is the key factor. The British Telecom (BT) revenue decline was unexpected even by the company. So given the kind of environment, the market assumes there will be some disruption like this in the future maybe not in the September quarter but further out. That is what is getting priced in here.

As far as the guidance goes, it was exactly what I expected.

Q: What is your own assessment of the BT situation- do you think it will remain a niggling problem and will show up because it is their largest client or do you think it was a one-off?

A: British Telecom seems to be transitioning some business to Tech Mahindra, where they own a very large equity stake. Tech Mahindra made an upfront payment of USD 100 million. A vendor paying a customer upfront is unprecedented in this industry. So, some more declines are possible but the impact on business won’t be as big as it would be in the June quarter.

The company’s revenue guidance for September quarter was in line with what we expected. They are delivering along the path they had promised. They are not doing more than what they promised. Their ability to manage growth in this environment is pretty good.

Q: The market is also worried that since the revenue dollar guidance was not raised, there might be slips in the second half of this year for a back ended guidance, is that a legitimate fear in your eyes?

A: In this environment of customer specific situations, they still have decent exposure to financials. UBS is one of their top 10 customers. It is fair for the company not to get too aggressive at the moment. They are delivering along the path that they had promised at the beginning of this fiscal year and that is good enough. It translates to more than a 25% rupee growth and somehow the market seems to be ignoring that and focusing on the lack of increase in dollar guidance. I think it’s an opportunity to get into the stock at this point.

Q: What did you make of the body language from Infosys on Friday? Did it sound like a management that was ultra cautious or was it business as usual. Did you take away any great negatives form how they spoke and what they said?

A: They sounded more credible now than they might have sounded three months ago, where they had said that growth is going to come from the September quarter onwards. But one was not sure how this would happen and why they were confident of growth coming back from September quarter. Now, things seem to play out as they had promised, they have increased their credibility yet again.

Q: How does the stock stack up in terms of valuations at EPS Rs 100 plus if one compares it with the historical P/E band that this stock has traded at, what doest it suggests to you?

A: It is not far from the low end of its trading range. The low end maybe Rs 14-15 and it is not very far from that. It looks quite attractive especially when one is looking at a 25% growth for the next couple of years. So, even if the March 2010 growth gets scaled back due to any customer specific issues, one is still looking at 20% plus growth in the next couple of years.

All the other matrices are pretty strong. Their profitability, return of capital, margin management, are all strong and it looks quite attractive at this point in time. If one looks at it from a 6-months perspective it looks attractive.

Q: Do you find it ironical or even unfair to an extent that a stock got punished such a lot when the rupee was moving against them and now that the rupee is working in their favour, the market ignores the rupee number completely?

A: The stock had a nice rally from the Rs 1,300 levels all the way close to Rs 2,000. It was a big move in an environment we are in. Some people expect the momentum to continue and are leaving the stock at this point in time. It just gives us a chance for more value investors to come in. I think it’s unfair but that is how the market is. 

Q: Do you expect some other IT companies to disclose any large MTM losses or even actual losses with the large hedges they were running?

A: I think Infosys set a bar by taking hedging losses through the P&L, given that investors are going to ask these questions to other companies. So one might see some of that activity in the results, if not included in the results there will be lot of questions asked and another discussion on the same. So one way or the other those numbers will come out in discussion.

Q: What do you expect to see from other frontline IT companies? Do you think it might do a bit better because of absence of any one issue like the BT, which Infosys had to report?
A: I don’t expect any big growth out of the June quarter from anybody. The best one can expect is a 3-4% growth in the case of Satyam. I expect Satyam to raise its guidance and a slightly more positive commentary similar to what Infosys is saying about the September quarter.

So I don’t expect any BT like surprises for any other companies. At the same time that doesn’t mean one is going to see a strong growth in the June quarter because there was a bit of freeze on contract signings earlier in the year which affected the June quarter business

Q: Do you think the sector can continue its relative out performance relative to the Index and other sectors, as it has for the first six months of the year or does Infosys change that?

A: Yes. Infosys does not change that. We expected Infosys to raise guidance to Rs 100 and that is what they did. We feel that things are moving along. We are concerned about things getting bad on the macro front and perhaps another round of difficulties in the banking sector and so on. But with where the valuations are right now, I still think this sector remains one of the most attractive not only in the context of India but tech in general on an Asia wide basis. There are very few places where there is certainty of growth and at the same time reasonable valuation.