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Infosys’s Crime…Unearthed Again!

First, here is a short analysis of the latest quarterly result announced by Infosys early today morning.

Source: Infosys, Safal Niveshak Research; * EBITDA-Earnings Before Interest, Tax, Depreciation & Amortization (Also known as Operating Profit);
** Volume-Number of man-hours billed during the quarter

As you can see from the above chart, sales growth has come in at a strong 31% YoY during the quarter ended December 2011 (3QFY12).

This is a much faster pace of growth than what Infosys had recorded during the previous quarter ended September 2011 (2QFY12).

The story is the same for other two key growth numbers – EBITDA or operating profit, and net profit. Growth on both these parameters has been much sharper in 3QFY12 than was seen in 2QFY12.

What is more, the company’s EBITDA margin (EBITDA divided by Net Sales) has also improved, from 28% in 2QFY12 to 31% in 3QFY12.

The company has also won 5 big deals during the quarter, and has done well in an overall weak environment.

Then, it has also raised its FY12 sales and EPS (earnings per share) guidance. For instance, as against an FY12 EPS guidance of around Rs 145 per share that the management had announced in 2QFY12, it has now guided for a figure of around Rs 147 per share.

Now after all these positive numbers announced by the company, what is Infosys’s stock doing?

Well, it is down almost 7.5%! The stock has seen its market capitalization erode by around Rs 120 billion or Rs 12,000 crore!

So what could be the reason for such a big divergence in the company’s performance on the business front and the stock market front?

It’s the ‘expectation’, stupid!
Disappointed business channel experts have started asking, “Is Infosys headed for a re-rating?”

But where has Infosys gone wrong?

If you had heard the company’s management talk on CNBC this morning, the culprit lies in the weak business outlook it has reported for the ongoing fourth quarter.

While raising its revenue and EPS guidance in Indian Rupee terms, the company has guided that these numbers would remain muted in US Dollar terms.

In effect, what Infosys has done is hit the expectations that the stock market analysts had from it, on the wrong side.

Now what will happen is all these analysts will go back to their elaborate excel models, rework their numbers for the current quarter, and subsequently revise their guidance for Infosys.

Then they will reappear on the television, spewing their new guidance on the stock as if that will remain sacrosanct for the next 1 year.

The reality is that this new guidance and the stock’s new target price will remain there only till early April 2012, when Infosys will announce its FY12 results.

Then the cycle of expectations – and tallying these expectations with reality – will repeat itself.

Sometimes I believe if this concept of projecting the next quarter’s or full year’s sales and earnings estimates is a crime on the part of Infosys.

Of course the people running the show at the company are dedicated and smart men and women, who know exactly what their long term vision is and are capable of guiding the company there.

But why predict a couple of numbers ever quarter, and then lead the analysts and markets on a tizzy in a game of expectations versus reality?

Who wins this game?

Certainly not the investors!

Stock market and business channel experts?

Maybe yes, for they get new fodder to chew and spit out every quarter and in the process make sure that they show some work for the irrational salaries they are paid to…well, predict the unpredictable.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. First things first, the new look is simply awesome 🙂 the Print and PDF option are a big welcome 🙂
    Secondly, when I saw the stock mkt react to the Infy’s results today, I was intimidated to write a mail to you to write about it if it is possible, but there you go, a cleanly written article about the “crime” 🙂 The best example of the “cycle” goes with Infosys, have been tracking its results and the reactions from 2008(i think), don’t remember one quarter going wrong w.r.t the known reactions stock markets do 😛 I am expecting this fall to continue for another 100-200/- otherwise, there shud be a pullback rally tomorrow itself. But in a way sometimes its a good thing that small investors might get a chance to get into infsy stocks with this correction. Also, would like to know if Infosys is on your list of “Stock Talks” ?


    • Hi Prasad,

      Thanks for your feedback on the website and also on Infosys’s post.

      Infosys wasn’t on my list of StockTalk as yet. But if you want, I can add it there among the probables.


  2. Thanks Vishal.
    Yes, that would be great. BTW, your piece on Tata Steel was really helpful for someone like me who likes to understand the business, its associated risks and yes the entry prices too. I think I have already made use of it to enter tata steel.
    Thanks so much. Hope you keep going with your rocking articles and this is not exaggeration 🙂

  3. Srinivas says:

    Hi Vishal,
    I am just a beginner learning lessons on the stock market now. I entered into your blog and strolled over several articles. It seems you have not got Pharma stock in your portpolio. As you agree, India has a commanding position (globally) in bulk drugs, could you do favour of analyzing an upcoming midcap/smallcap pharma stock for long term investors.
    Indeed I have pleasure in reading Prof. Bakshi article on meeting Mr. Piramal, and it would be very great for value investors to find one such stock again. looking forward to read more articles in this great blog, and wish you a lot of fun/hard time in ‘why papa’ questions.

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