Saturday, April 13, 2013

INFY and the present Economic Scenario.

INFY
INFOSYS' results were out yesterday and the stock crashed by around 20%, biggest intra-day fall in a decade. INFY has around 7.6 %( Source- www.nseindia.com, March 28th 2013) weightage in Nifty, it pulled the Sensex down by 300 points and Nifty down by 65 points. ITC which has a 9.29% weightage in Nifty was up by 3.5%, else the indices would have fallen further. Falling topline growth, billing pressures, margin erosion are the reasons for this dismal performance. But the fall to the tune of 20% is not expected out of INFY as the stock positively surprised everyone in the previous quarter. This suggests that the kind of growth in the previous quarter is not sustainable. In the year 2011, one of my friend who happens to be a big-time trader (He holds several degrees in finance and worked for few pink papers and business channels) in the Stock Markets told me, if a company shows more ‘other income’ than the previous quarter/year and if they still cannot beat the estimates or show better results, the stock should be dumped. Incidentally the other income of INFY is higher and still they cannot meet the estimated growth. No EPS guidance from a company like INFY is another shocker. Investors, traders, analysts are looking out for the guidance from the other IT majors especially TCS to see whether this dismal growth is sector specific or company specific. The less aggressive top management is another reason to blame for the poor performance. INFY no longer has the first mover advantage as companies like Wipro, TCS, IBM, Accenture, HCL Tech., have started pricing their projects aggressively. It lost out to HCL when it planned to acquire Axon Technologies few years back. Not only Axon, INFY lost few other bids in its plan to acquire other companies. With double digit inflation in India, freezing salary hike last year played havoc and when the attrition started increasing they had to change their policy. The global economic scenario is not favorable either. With the Eurozone reeling under crisis and the less spending of companies both from Eurozone and US had taken a toll in the Indian IT sector.


Gold
In India, the total Gold import per year is around 820 tons. For the year 2012, it was around 860 tons. This doesn't include the smuggled Gold into the nation. In the budget, traders and analysts expected the Government to hike the import duty on Gold but Gold was spared. If the current account deficit is uncontrollable the Government may impose more duty on Gold imports. Gold imports are a major contributor to the current account deficit. One troy ounce (1 Troy Ounce= 31.1034768 grams) of Gold in the International Market is trading around 1550$ and is expected to decline to 1400$. If the Gold imports are lesser this fiscal, this would help the Rupee to appreciate against the US dollar and help narrow the current account deficit too. As the demand from India and the demand from Eurozone has been declining it is highly likely that one Troy of ounce of Gold may hit 1400$ soon.

Rupee
FIIs (Foreign Institutional Investors) have invested around 26 Billion Dollars in the Indian Stock Markets and they were selling in India and were moving the money to Japan and the USA. Meanwhile US stock markets are trading near life time highs and the Government is presently purchasing bonds worth 80 Billion Dollars every month. This releases huge cash into the economy through the banks and they may soon stop this Quantitative easing. The Yen carry trades which is not attractive in the recent past may become attractive again as the BoJ (Bank of Japan) has started easing the monetary policy. This has attracted more money into the Japanese markets. As the Yen declines, it is good for the exporters. In India, meanwhile the Rupee declined in the year 2012 and it was the third worst performing currency in Asia. It had hit a low of 57.32 per dollar in the month of June 2012. Indian Government under the new Finance Minister has recently liberalized the foreign investments in the Indian G-Secs and Corporate bonds (Source- Ministry of Finance). This would encourage the capital inflow in to the country and eventually Rupee would appreciate against the US dollar. Allowing FDI is another important policy measure which will have a huge impact in the economy and on the Rupee in the medium to long term. The Government which was earlier blamed for having a policy paralysis seems to have finally woken up. Few foreign carriers are already in discussions with Indian airliners after the FDI norms in aviation were relaxed.

Some analysts whom I spoke to believe that Indian Rupee may reach 59 to a US dollar by year end. I beg to differ from their views. I feel we would be trading at Rs.50 or even less to a dollar by year end. If INFY posts a decline in net profit and shocking revenue guidance when the Rupee is reeling around 55 levels against US dollar, I am sure INFY and the other IT companies will struggle if the Rupee appreciates against the US dollar. The pressure to retain talent and YoY salary hikes to match the inflationary figures are going to be tough. When a company advises the investors about growing at 1.5% QoQ, I wonder what would run in the minds of the employees. Forget about double digit salary hike YoY, would they even be enojoying the current benifits or will they lose the battle to the demon called "Cost cutting". Though the present situation is grim,analysts expect the company to surprise the markets positively like it did in the previous quarter if the circumstances are favorable again.