Short call | The case for a contrarian view on Infosys, China stimulus, US recession

For a company that used to be known for beating analysts' estimates comfortably, Infosys also holds the dubious distinction of a double-digit fall in stock price whenever the quarterly earnings/guidance have fallen short of market expectations. In April 2003, the stock had crashed 32 percent in a single trading session on weak fourth-quarter earnings and a profit warning. Then in April 2013, the stock tanked 21 percent in a single trading session, again because of a weak quarter and cautious guidance. In October 2019, the stock crashed 17 percent in a single session following a whistle-blower complaint accusing the two senior executives of unethical practices to boost short-term profits. And just three months back, the stock had collapsed over 12 percent after disappointing with its quarterly numbers and guidance.

In some of the instances when the stock crashed, the issues had more to do with the company than the business environment. And yet each time, investors who bought the stock during a panic were better over the next couple of years. If nothing else, steep corrections in Infosys have provided short-term trading opportunities.

Infosys will be in the eye of a storm again today following the sharp cut in its revenue guidance for the current year. Not surprisingly, its latest performance has been greeted with a flurry of negative broker ratings and a cut in earnings estimates. A steep fall in the stock price looks very much on the cards. So Short Call has chosen to focus on the handful of analysts who feel that the stock may still be a good bet.

Broking firm HSBC has maintained its buy rating on Infosys with a price target of Rs 1,540. And what makes HSBC analysts Yogesh Aggarwal and Abhishek Pathak bullish? For one, they feel the market may be getting unduly pessimistic.

“We believe guidance of 7 percent growth was unrealistic, but now the pendulum has moved to the other extreme. The lower end of the guidance (1 percent) now means a nearly flat (-0.3 percent) CQGR for the next three quarters. This would mean at the lower end Infosys revenues would be flat for nearly six quarters (starting 3Q23). This seems quite pessimistic, especially when the US economy seems to be stabilising,” the duo wrote in their note.

Similarly, Jefferies too has maintained its bullish view on the stock with a price target of Rs 1,550, despite a view that some of the problems could be company specific, especially in its banking vertical. Analysts Akshat Agarwal and Ankur Pant have pointed out that the first quarter performance was better than peers and margins were stable.

“Infosys' new guidance leaves limited earnings risks in our view. The guidance implies a 0.2-1.8 percent CQGR (Compounded quarterly growth rate) over the rest of FY24 which seems reasonable and is unlikely to disappoint,” write Agarwal and Pant. If the stock falls around 10 percent on Friday, then it would be available at 19 times estimated FY25 earnings, which according to the duo is not a bad deal because the valuation would be in line with its 10-yr average and 13 percent below its 5-year average—both not expensive.

“With the stock available at below avg. PE on realistic earnings, we maintain buy,” says the note.

Goldman Sachs & Consultancy CRU Group have trimmed forecasts for copper usage in electric vehicles as they now expect improvements in EV design and efficiency to reduce copper content per vehicle, reports oilprice.com. The CRU Group now predicts that the average EV will use between 51-56 kilograms of copper from this year on against the previous estimate of 65-66 kilograms, reports mining.com. Goldman Sachs has slashed its estimate to 65 kilos of copper vehicle from 73 kilos earlier. Why does this matter? Because EV components remain one of the primary copper uses.

The much talked about recession may have already come and gone, as far as the US housing market is concerned. Builders are sounding less downbeat than they were a year ago, and the National Association of Home Builders index of industry sentiment rose to 56 in July from 55 a month earlier, reports WSJ. The latest reading is still depressed, but it is the highest since June 2022 and a significant improvement from the low of 31 recorded in December.

Investors looking for good news from China have something to cheer about, though it may not yet be time to uncork the bubbly. China’s economic planner said Thursday that two new policies for supporting non-state-owned businesses will be launched soon, reports CNBC. The eagerly awaited demand boost from China reopening has turned out to be a damp squib. If anything, the weakness in its economy has prompted China to dump certain commodities in global markets as it tries to clear inventory. Business sentiment is generally downbeat, but a long-standing debt overhang, among other issues, has made Beijing reluctant to embark on large-scale stimulus.