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April 15, 2009

Sensex at 11200 ! Risk to Continue Riding the Momentum is High…Caution Indicated

Sensex has climbed above it’s 200 DMA Levels and is currently 11200,pushing upwards…Nifty too is at 3450 levels

Caution is advised…We’re now at 13 times…Elections are on us and the mandate is unclear…Infosys has just announced lower earnings expected for FY 10…Satyam legal hassles begin playing up in June with the Upaid Trial….India’s Fiscal Deficit is already way beyond target at Rs 330000 crs + for both FY 09 that has just concluded and even that estimated for FY 10….Global Crisis continues to play out

Too many Low Cap and Mid Cap scrips continue hitting upper circuits…some would say this is a broadbased rally….I would say it’s a sure sign of being sucked yet again

Would be well advised to consider selling off into strong rallies and higher levels that this upward momentum is driving markets to,ignoring valuations

Essar Oil is a one off situation…Look what happened to Akruti

Don’t get sucked in yet again !

Assess Valuation Risks before Buying in 

Infosys begins the earnings season with a flat guidance for FY 10

Infosys has just announced their audited consolidated results for Q4 FY 09 ( Jan-March 2009) and also for the full year FY 09

For easy reference,I have summarised the performance as below

Audited Consolidated Results of INFOSYS TECHNOLOGIES LTD

 Financial Year 2008-9 ending March 31,2009

 

Rs in Crs

FY 09

at March 31,2009

FY 08

at March 31,2008

% Up

Income

21693

16692

30

Net Profit

5988

4659

28.5

Equity ( FV Rs 5)

286

286

Reserves

17968

13509

33

Networth

18254

13795

32

 

 

 

 

Book Value in Rs

319

241

32

EPS in Rs

104.6

84.53

24

Dividend in Rs

23.5

33.25

 

Dividend in %

470

665

 

Infosys has given a flattish earnings guidance for FY 10…so this 28.5% growth in Earnings in FY 09 is unlikely to be maintained in FY 10…In fact they estimate that the EPS would drop into the range of  Rs 95.65 to Rs 101.18  

Infosys has reacted by 5% to Rs 1345…that’s a forward PE for 13 to 14

Company’s Top Management voice their caution as below

  • Expect Pricing to drop by 6.5%
  • Expect Operating Margins to drop by 3%
  • Survey of 135 Clients that contribute to 83% of Revenues revelas that 60% say that their IT Budget will drop by 10% 
  • Environment continues to be challenging
  • Utilisation rate has dropped to below 68% and will remain under pressure

Clearly Infosys is expecting  tough times ahead and is being candid about it.For a first time in many years it may actually earn less in the coming year than it did in the year just concluded…I fear if the Rupee appreciates to Rs 45,the margins will come under more pressure…Currently Infosys has hedged US $ 500 Million

Don’t expect Infosys to perform brilliantly on the bourses anytime soon…at Forward PE of 13 and 14,there is a good chance  that the share price will react by atleast 20% towards Rs 1000 

Clearly the IT Sector is not going create any magic in your portfolios this Year….even if the Rupee sinks to Rs 55 and beyond,clients would leverage for further price cuts

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