How Infosys P/E contracts or expands on result day

Riken Mehta
moneycontrol.com

IT major Infosys may have lost its mojo for past few years but it still remains a darling stock for option traders ahead of its quarterly earnings. Erratic movements of Infosys stock price post results have rewarded bearish traders with smart gains every three out of four occasions in the last 12 quarters.
 
Infosys will announce its second quarter results of FY14 on October 11 and the F&O traders once again have positioned themselves in the Infosys for a big vicious movement post results.

This article compares how the price earning multiple (P/E) of Infosys changes before and after result announcement.

Also Read: Infy Q2 Poll: Net to rise 10%, FY14 guidance may be raised

Price earnings multiple is calculated by dividing the stock price to earnings per share of the company. In simple terms, if Infosys P/E is 18, it means the company will take 18 years to generate profits equal to the current market price based on the current earnings per share.

For calculation, the trailing 12-month consolidated EPS (TTM EPS) has been considered. The average change in P/E for Infosys on the result day for last 12 quarters or 3 years (15-Oct-10 to 11-Jul-13) is 2.45. 

The management's commentary on different business verticals performance, revision in guidance, client's spending scenario and key business verticals exit are some of the factors along with quarterly earnings performance that the market will watch it closely on result day and based on them market will factor it in price.

Currently, its trading at 18.67 P/E based on consolidated EPS (Price Rs 3100). Considering the huge built-up in options and based on the quarterly earnings performance on either side if the stock's P/E changes by an average 2.45  (assuming Infy posts close to Rs 42 EPS in Sept quarter as well, TTM EPS will be Rs 166 ) then expect 400 rupees or 13 percent movement on either side (CMP Rs 3100). In that case, option buyers will not make money

If TTM EPS expands or contracts by 5% (TTM EPS Rs 175, Bullish scenario where Infy posts an EPS close to Rs 50 or TTM EPS Rs 158 highly bearish scenario where Infy posts an EPS close to Rs 33) then change in P/E and price adjustment will take Infy close to Rs 3700 (Bullish) or Rs 2550 (Bearish) translating Rs 550-600 movement on either side. The earnings upgrade or downgrade will be the key factor on result day.

For detail analysis, Click on the attachment

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