Infosys Up, Markets Down

Nifty, after breaking through the 4630-4830 range, opened on a high today with but then failed to maintain the heights. As mentioned yesterday, a bout of profit booking set in because market participants are still scared of the markets and are happy with small profits. There is a lot of resistance to be expected between the 4950-5000 zone. On the way down 4830 and then 4630 are good support levels. Buying for the short term could be done at these levels. A move below 4730 will change the short term trend to down.

As suggested in earlier newsletters, a trend in Nifty can develop only if it goes above 5000 or, God forbid, below 4500. As of now it seems as if going below 4500 is a remote possibility. On the daily charts the Nifty has made a doji pattern which means that the open and closing price were very close to each other. This represents indecision. And since dojis are normally found at the end of short term trends, and since today’s doji was found near the top of the range, we may expect the Nifty to come down for a day or two. It may then decide to find support near 4830/4630 and then reverse or continue its way down to 4480. Let us wait and see what it decides to do. A move above 5000 could take it up to 5450-5500.

Let us look at Infosys Technologies. Two days ago it closed at a price of 1421.90. Tuesday morning it came out with its results which were not brilliant but just in line with the expectations. Considering the hostile conditions in which Infosys was operating, such normal results may be called brilliant. Anyways, in the results, it confirmed that in accordance with its guidance of an EPS (Earnings per Share) of 81.5 given last year, it has actually delivered an EPS of 81.56. At a price of 1421.90 and an EPS of 81.56, the Price to Earnings Ratio (P/E) is 17.43x. For next year Infosys has given a guidance of an EPS of 92.30-93.90. And as is its reputation of exceeding its guidance, it may be able to deliver a growth of 17-19%, lets take it as 18%. At 18% and with the base at 81.56, next year’s EPS is likely to be 96.24. At an EPS of 96.24 and a price of Rs.1421/90- the P/E is only 14.77 which is very cheap. Just to maintain its current P/E of 17.43, Infosys would have to be priced at Rs.1677/-. This is the main reason why we saw it jump in the last two days.

In a year or two, the situation in the US should be better than what it is today. As the situation improves, the P/Es will have to be rerated. At 17x what is expensive today may even be cheap at 25x when the situation is better. Considering that the situation does not change drastically but only becomes a little better, we can easily expect Infosys, a market leader, to be trading at 22x its earnings. With an EPS of 96.24 and a P/E of 22, Infosys would have to be trading at Rs.2117/-. Since the markets always look into the future and assuming that Infosys again gives a guidance of 18% for FY 2009-2010, then the EPS in 2010 would be 113.56 and with an EPS of 113.56 and a price of 2117, it gives a forward P/E of only 18.64x which is not, in any way, stretched. It is very reasonable. So 2100 maybe the target one may be looking at a year from now.

But what do the technicals say? Look at the daily chart of Infosys above. Two good days have pushed the price decisively out of the range between 1400 and 1550. This range breakout gives us a target of between 1650-1700. On the other hand, it has also broken out of its downtrending line and has come back in an intermediate uptrend. The target of this pattern is close to 1950. So, with a little bit of resistance between 1650 to 1700 it may go up to meet its target of between 1900 and 1950. It’s a buy now with a stop loss of 1520.

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Happy investing!!!

Update: This article was also published on the business and investing page of Reuters.

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