Revising Infy price target from Rs 2750 to Rs 2500: Karvy

But Ravi added that he still preferred Tier-I companies. And, as far as the Tier-II IT companies are concerned, he preferred companies like Subex , 3i Infotech , and Rolta . Ravi believes that events in the next six months will drive the price of the IT major.

Excerpts from CNBC-TV18's exclusive interview with R Ravi:

Q: What have you made of it? What kind of price and earnings target would you put at Infosys now?

A: I will be revising my earlier price target of Rs 2750 to around Rs 2500 levels. My really worry is the rupee appreciation , which is not showing any signs of easing, because fundamentally from all of the numbers it is looking as strong as it were. But if the rupee is going to appreciate and you are going to see a very strong inflow of dollars and for RBI the sterilisation is not a profitable proposition, then they would be finding it very difficult to sustain year on EPS of Rs 78 though they would be growing very strong on the dollar guidance and will be able to grow the dollar revenues.

Unless and until we see some kind of strategic shift in  revenues coming from US, to a significant portion coming from Europe along with consulting and products, the rupee revenue growth and profitability growth will be very difficult to achieve.

Q: What are your full year EPS estimates for FY08, and if it is not too early, for FY09 as well?

A: For FY08, I would probably come down to an EPS of around Rs 80 from an earlier Rs 87. For next year, after factoring in around Rs 7 appreciation on top of around 38.5, EPS of around Rs 97-98 looks achievable. But it all depends on the rupee; the company would go from strength to strength in dollars. But the company has to do something on the acquisition front by scaling up the consulting revenues. They have to also start pruning the losses of the subsidiaries in a very big way. So, every Re 1 will now count for the company.

Q: How are you feeling about the other key metrics of the business themselves - about a 1% blended increase in the billing rates, in addition to the volume growth, which is about 7% sequencily? Is that part of it is looking ok aside from what is happening with the currency?

A:  I think the growth in terms of volume is very decent. I expected billing rates to go up around 1.5 % and that is not happened. May be it can happen in the subsequent quarters. What is worrying me is, how can the company manage if the rupee keeps on appreciating at this pace, because the leverage available with the company are utilisation, billing rates, productivity and the cost structure. Now, you can manage all these things as the rupee appreciates in every modest fashion over a longer period of time. Now if there is no intervention by the RBI and the rupee keeps on appreciating, I don’t think that Infosys , or for that matter any other company can manage the situation. Fundamentally, they are very strong; I have no doubt about it, but the rupee earnings will be very depressing  as you go forward.

Q: In that backdrop, is your price target of Rs 2500 quite ambitious, because even if they will be delivering Rs 80 this year, you are talking about almost 32 times current years' earnings 31-32 times and even on next years (FY09) earnings, your estimate is about 26 times? Isn't 26 times FY09 too aggressive for a company which will probably grow at best 20% earnings?

A: My rationale is that I am not building the price target only on the premises of earnings. I am expecting some kind of event triggers to happen, because now the company has to necessarily make more acquisitions; till now they were able to grow the earnings organically, which was quite strong. So, the company had to do all these acquisitions, strategies, etc. But I think out of necessity, the company will have to rework their strategy and will have to migrate from reporting only the earning based growth to event-led earnings growth as well. So I am expecting some events to unfold in the next six months; as a result, I have kept the price tag at Rs 2500.