Infosys Q3 FY12 Results – Is the 8.4% fall justified?

Consolidated results for the quarter ended December 31, 2011 were reported by Infosys today. The highlights of the same are:

1) Revenues were Rs 9,298 crore for the quarter ended December 31, 2011; QoQ growth was 14.8%; YoY growth was 30.8%

2) Net profit after tax was Rs 2,372 crore for the quarter ended December 31, 2011; QoQ growth was 24.4%; YoY growth was 33.3%

3) Earnings per share (EPS) was Rs 41.51 for the quarter ended December 31, 2011; QoQ growth was 24.4%; YoY growth was 33.3%

The results beat most of the market expectation. But the flat earnings projection (QoQ) for the last quarter of the year owing to volatile economic environment especially in the Euro zone dampened the mood and the stock of the company fell 8.4% by the end of the trading session. Now the question is: Is this fall justified?

Let us take a look at the Q4 guidance given by Infosys:

1)     Revenues are expected to be in the range of Rs 9,391 crore and Rs 9,412 crore

2)     Earnings per share (EPS) is expected to be Rs 42.12

Although this is almost flat QoQ, but if we consider the YoY implications of this guidance, revenues are expected to grow by 29.5% to 29.8% and EPS by 32.4%. This is a rather impressive YoY growth which was last seen during FY2008-09 for Infosys. For the past two years, the EPS growth was rather sluggish as compared to this. But is this stock fall owing to a drastic reduction in value of the company?

Let us consider a simple P/E multiple based valuation of the stock.  As per the FY12 guidance, the EPS for the period FY12 would stand at Rs 147.13 per share. Also, the market based consensus for Q4 EPS estimate was Rs 43.68 per share (http://finance.yahoo.com/news/Infosys-tumbles-Q4-guidance-theflyonthewall-691393143.html?x=0 assuming USD/INR = 52), which implied a year end EPS of Rs 148.69 per share.

Let us assume that the market price as on 11^th Jan (before the result announcement) was in accordance with these estimates. Q1 and Q2 figures were already known and Q3 EPS figures were in line with the market consensus. So, whatever fall that occurred was owing to the lower guidance. So, forward looking P/E multiple as on 11^th would have been 19 (Closing price of 2826 divided by 148.69). After the fall, the forward looking P/E multiple stands at 17.59 (12^th Jan closing price of 2588.6 divided by 147.13). This indicates a lowering down of P/E multiple. This indicates lowering of confidence in IT industry and not just Infosys.

So, if you feel that scenario for IT industry as a whole has worsened in the past few days and that is why, the price of Infosys should fall, then stay out of the stock.

On the other hand, if IT industry scenario has not changed in the past two days (my own view is along these lines), then the drastic fall in the price of Infosys seems to be an overreaction to the lower guidance figure. Based upon that, I would keep a target of Rs 2800 (147.13*19 = 2795) for Infosys.