US economy and the US Dollar outlook is positive
The outlook for the world economy, especially the US economy is clearer now. We are predicting that the US economy will lead the world forward and the US Dollar (USD) will strengthen. In this scenario the direct beneficiaries of a strong US economy and a strong USD are the IT companies.
Conservative guidance by Infosys does not diminish its prospects
Infosys gave an extremely defensive guidance for revenue and earning growth for the financial year 2013. Revenue growth in USD terms is slated at around 8% to 10% while in Rupee terms it is projected at 14% to 16%. Earnings per share (EPS) growth in USD terms is expected at 4% to 5.7% and EPS growth in Rupee terms is expected at 9% to 11%. The revenue growth of 8% to 10% is below industry estimates of around 14% and this has spooked the markets. Infosys share price fell 12% post guidance announcement. Markets are busy de-rating the stock post the guidance and this de-rating is going against the expected re-rating analysis sent out by us in March.
The Infosys stock at Rs 2363 is trading at a price earning ratio (PE) of 15 times 2013 earnings and at 13.5 times 2014 PE. (assuming an earnings growth of 10% for 2014). What is the potential for the stock going forward
Outlook for the US economy and the US Dollar is positive. Against this backdrop, IT sector growth will improve leading to companies like Infosys delivering results that beat guidance. Infosys and the other IT biggies of TCS, Wipro and HCL Technology will be outperformers in this scenario.
What is the return expectation from Infosys?
The fact that markets look to discount 2014 earnings when a company starts to beat its estimates will make the stock perform and deliver 38% returns from current levels of Rs 2400. The fact that the stock is down 12% since the time we brought out the re-rating analysis in March brings down returns from levels of Rs 2800 levels to 18%, assuming a 20% rerating of the stock.
Stay invested in Infosys and if not invested buy at current levels.