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Why Infosys may continue to be a laggard


Bank of America Merrill Lynch put out a note last week saying Infosys was among the most under-owned, under-valued and under-performing stocks in the Indian market. Infosys' cheap valuation led BofA-ML to pick the stock as a probable outperformer for the next year. However, the rally that BofA-ML expects in Infosys shares in 2013 is unlikely if the company fails to maintain its modest sales outlook for the current fiscal year (2012-13).

Infosys, which expects sales to grow at 5 per cent, may fall short of its guidance, analysts say. After two big investment banks, UBS and Nomura, doubted the company’s ability to achieve 5 per cent sales growth in FY13, Barclays came out with a report saying Infosys may grow at 3.8 per cent in 2012-13 – a sharp contrast with the 11-14 per cent growth projection for the IT industry.

Barclays’ estimates are based on an interaction with Infosys CFO Rajiv Bansal.

The anxiety about a possible miss in guidance is already reflecting in the stock prices. Shares in Infosys closed lower for the eight straight day on Monday. The stock has shed nearly 5 per cent in the last week and is down 1 per cent over the month since November 9. In contrast, the broader Sensex has gained nearly 4 per cent over the last month.

TCS shares have fallen more than Infosys - over 6 per cent in the last month - but that's because TCS is overvalued. The stock hit its 52-week high at a time when Infosys traded near its year-low.

Infosys shares are down 14 per cent since last December because of the company's continued underperformance. And if the pessimistic growth forecast comes true, the stock is unlikely to do much even if broader markets rally, analysts say.

The key pain points for Infosys refuse to go away despite changes in the management and the company's willingness to grow inorganically.

Barclays says Infosys has seen delays and postponements in a few large projects. Uncertainty in the financial services vertical has increased. Early indicators suggest a decline in IT budget of financial services customers. These issues have been a drag on Infosys' share performance over the last year and they are likely to continue going into the New Year.  

Why 2013 could be no different?

New Jersey-based Cognizant - expected to end 2012 with 20 per cent growth - may witness a slower 16 per cent growth in 2013. This projection, not an official guidance, is based on Cognizant's compensation filing with the US Securities and Exchange Commission. Cognizant has outperformed Infosys in revenue terms over the last two quarters. Analysts say the trend is likely to continue.

Where could the stock go?

Infosys already trades at a significant discount – the current 13.9 times forward price earnings are at a 23 per cent discount to its five-year average. But a weaker macro scenario could result in declining profitability for the next two quarters and multiple compressions to 12-times FY13 PE, indicating a share price of Rs 1,920, according to Barclays.  UBS and Nomura also have a "neutral" rating on the stock.

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