IN 1999, N.R. NARAYANA MURTHY, the founder chairman of Infosys, was asked when the company could see a fall in revenue. “Not for a decade at least,” said Murthy confidently. Those were the heady days for information technology companies, with the big ones growing by 100% a year, and trading at price/earnings multiples of 100 to 200; such high numbers indicated that investors expected even higher earnings growth in future.
Murthy’s answer was to a question asked by Aniruddha Dange, then an IT analyst at broking firm CLSA and now head of India Infoline’s equity research team. Till some weeks ago, CLSA, like most of the investing community, was bullish on Infosys despite ominous signs of a slowdown. In early January, CLSA had upgraded Infosys to ‘outperform’.
And then, last month, Infosys announced that its sales for the quarter ended March 2012 fell 1.9% (quarter on quarter). It added that revenue for FY13 would be lower than expected due to poor global economic conditions. The company’s shares fell by close to 15% in the days following the announcement. Nimish Joshi, IT analyst at CLSA, shot off an open letter to Infosys CEO S.D. Shibulal, demanding an explanation for the poor guidance.
Not everyone agrees with this. Shankar Sharma, global trading strategist at broking house First Global, says such a reaction after just one quarter’s results reflects a short-term outlook. In the mid-’90s, Sharma called the Indian IT industry a “body shopping” business, and was doubtful about the industry’s growth rate. But Infosys steadily beat expectations. Four years later, Sharma recommended a buy on Infosys for its long-term growth prospects, and hasn’t changed his opinion. “Here’s a company that wrote the rules of the game. It will be silly to write it off.”
Dange too is bullish on Infosys, saying it has the highest margins in the sector. He adds that TCS under N. Chandrasekaran has acquired the same status Infosys had under Murthy and then Nandan Nilekani. Bharat Shah, executive director of ASK, a Mumbai-based investment advisory firm, agrees that the “Chandra factor” helped TCS; the company is perceived as a better growth engine than Infosys.
Shah adds that the magic of India’s IT sector started wearing off five years ago. Till then, his portfolio was skewed towards it and Infosys accounted for 15% of his fund (when he managed the Birla Advantage Fund). He refuses to talk of specific investments in the sector, though he admits that he has not invested in Infosys recently. “There may be spikes of good performance but there is nothing new to suggest that there won’t be a squeeze in growth in sales or profits going forward.”
