Infosys will be coming out with its first quarter FY08 numbers tomorrow. Investors are worried that an appreciating rupee, currently at Rs 40.41 against the dollar, will impact the company's revenues.
Most tech companies have a major portion of their revenues billed in dollars and any major fluctuations in the rupee's movement could severely impact margins.
Expectations from Infosys results
A bit of bad news in first quarter can surely be expected. That is pretty much expected by the Street, though Infosys is typically not in the habit of coming below or delivering numbers below its guidance for the quarter. But that is almost certainly what it will do tomorrow. One would be extremely surprised if they don't slip on their first quarter guidance and deliver numbers, which are way below it. In fact, adjusted for some tax rise backs in the previous quarter there was expectation that something like a 13-14% sequential fall in profits will be seen; that is quite alarming by Infosys' standards. But that is just half the story. It is pretty much in the price.
We have all seen how smartly the rupee has appreciated versus the dollar in the last few months. The figure is 6% plus; therefore, it is only understandable that margins will be under huge pressure tomorrow for the first quarter. The more important question is what it means for the full year guidance of Infosys and that will determine how Infosys moves tomorrow, how the IT sector moves tomorrow and how even the overall market may move tomorrow, because if Infosys comes in and lowers its guidance for the full year, then I think the stock might be in for a fall, regardless of its recent underperformance.
The big question from a market perspective is whether volume growth, business volume growth and any kind of pricing or rate increases can offset much of the damage of the rupee appreciation and that is what Infosys has to come out and say tomorrow.
Will average performance help?
It all hinges around the kind of guidance - annual guidance - that Infosys comes out with. If in the context of what has happened to the rupee, Infosys comes out and says tomorrow that yes, we have gone through pain in the first quarter but we still believe we can hold on to our annual guidance of Rs 80-81 earnings per share, without raising guidance a little bit, I think the stocks may rally, because these have been big underperformers and even status quo for the full year would be reason enough for the market and the sector to rally from hereon.
However, if Infosys comes in and says that because of the rupee, they will have to scale down their EPS guidance in rupee terms for the full year and will not be able to do much more than Rs 77-78 per share, then the stock might actually fall a bit, because there has been a 5-6% move on the stock, in the last few days on the way up. If the EPS guidance is anywhere between Rs 77 and Rs 80, the stock may remain flat, just move in at 3% up or at 3% down kind of band. So, this is broadly the horizon of what can be interpreted as good news or bad news by the market tomorrow. It just has to say that it is status quo for the year and that would be reason enough for the market to rally; the expectations are as you said, quite muted this time.
Importance of Infy numbers
I think it is quite important from a market perspective because this market has reached an all-time high and gone on to 15,000 with absolutely no support from technology as a sector and that accounts for 15-20% of the Index. So, if tomorrow, the news is not too bad, then you could probably build a case. After such serious underperformance from the tech sector, if the sector tries to play catch-up once again, that might be the building block for the Sensex to build above that 15,000 mark and proceed with this rally.
However, if at these kind of alleviated levels, Infosys comes in with fairly dire news, the stock might sell-off and so will the sector, in which case the Sensex and the Nifty might also sell-off a little bit. So, it is important for the sector, particularly because of how badly it has underperformed for the last three months; it would be seeking some good news for Infosys to climb up and play a bit of catch-up. But it is difficult to predict, which way it will crack up tomorrow. We will just have to wait for the event and watch.
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