Why Infosys is more vulnerable to economic crisis than TCS, HCL

Infosys appears to be at a vulnerable spot at the moment, relative to some other top tier IT players such as TCS, Nasdaq-listed Cognizant and HCL Technologies.

The June 2012 performance reveals that Infosys is facing pressure on the revenue front, even though the company has been more consistent than the peers when it comes to client addition in the past few quarters. There could also be a possibility that the company may have obtained new contracts at reduced billing rates though the management has guided for a stable pricing scenario.

In January 2012, we had advised investors to reduce exposure to the Infosys stock, which was then trading at over Rs 2,600. It soared to over Rs 2,900 in subsequent months, but failed to sustain gains. It fell sharply on the results day in each of the two quarters to June 2012. It currently trades closer to its 52-week-low, which reflects a six-year low forward valuation. Though the stock is now available at a way cheaper level compared to its historical valuation, we don't anticipate a sharp recovery in valuation any time soon. We retain our call to reduce the stock until a significant trigger emerges.

Growth Concerns

The company's growth rate in revenue and profits has slowed down over the past two years. Moreover, the company has also reported a higher volatility in its margin performance, even though it has been able to retain margin leadership among the top IT players.

In contrast, TCS has been able to retain its growth streak while taking advantage of a demand rebound in the period subsequent to the subprime crisis of 2008. This is apparent from the analysis of trailing twelve-month revenue and net profit data in dollar terms over the 13 quarters to June 2012. In the 12 months to June 2009, Infosys' dollar-denominated revenue was 78% of TCS's revenue.

The proportion has reduced to 68% three years later. In addition, Infosys had earned $1.2 billion in net profit in the said period, marginally more than TCS's profit of $1.1 billion, reflecting far higher net profitability. However, this has changed since then. According to the latest data, TCS earned $2.3 billion in net profit in the 12 months to June 2012 compared with $1.7 billion for Infosys.

This also means that the margin leadership of Infosys over TCS has gradually reduced. The difference between their net margins has shrunk from over 870 basis points in the 12 months to June 2009 to 290 basis points in the 12 months to June 2012. Infosys has long adhered to its strategy of maintaining high profitability of business. The benefit of such a strategy seems to be diminishing in the absence of a relatively lower topline growth.

Infosys has also reported over 3% pricing decline in the June 2012 quarter. Though TCS has also taken a 1% drop in the billing rates, Infy's price cut looks steeper compared to its historical trend. In addition, Infosys has factored in over 4% pricing drop for the rest of the fiscal, which raises doubts whether the company is losing its premium positioning in the outsourcing market.

Valuation

The stock of Infosys touched a 52-week low of Rs 2,163, after a disappointing performance in the June 2012 quarter. It, currently, trades closer to this level. The company has guided for an earnings per share of Rs 166.5 for FY13, which results in a forward P/E valuation of the stock at 13. This is, by far, the lowest forward valuation of the stock since at least 2007. The valuation reflects the worsening expectations of a quick turnaround in the company's business. The company has guided for an at least 5% dollar denominated revenue growth for FY13 citing currency fluctuations and pricing decline. Given this, an immediate bounce in the stock price looks difficult.

Think before eating organic food, it may turn you into a jerk

LONDON: Eating organic food can make you a jerk, as a new study has claimed that people who are exposed to such eatables are more likely to exhibit judgmental attitudes. "There's a line of research showing that when people can pat themselves on the back for their moral behaviour , they can become self-righteous ," the author Kendall Eskine as saying.

For the study, Eskine, assistant professor of the department of psychological sciences at Loyola University in New Orleans, and his team split 60 people into three groups. The first group was shown pictures of organic foods, second was shown pictures of comfort foods like brownies, and the third, control group, was shown pictures of non-organic , non-comfort foods, like rice, mustard and oatmeal. "We found that organic people judged harder. There's something about being exposed to organic food that made them feel better about themselves and that made them kind of jerks," he said.

Julayi

Director Trivikram Srinivas had recently shot a promotional song for his upcoming movie Julayi. The video song which has Allu Arjun and Devi Sri Prasad will be launched next week. The duo had danced for the song Pakado and it was entirely shot in Old city, Hyderabad. Devi Sri Prasad had unveiled the first look of this promotional video on Twitter. This promotional song is first of its kind in tollywood. Ileana is playing the female lead. Rajendra Prasad, Sonu Sood will be seen in important roles. Trivikram Srinivas has directed the film and S Radhakrishna has produced it on Harika and Hassine movies banner. Devi Sri Prasad has composed the music. The film is going to release all over South India in a big way on August 9.