Hedge funds were mainly responsible for Infosys' free-fall over the two days since the company declared its results and guidance for 2003-04. 

In the two sessions, Infosys tumbled 37% to Rs 2,617.50 (on Friday, 11 April 2003) from its close of Rs 4,158.05 on Wednesday. The company announced results at the onset of trading hours on Thursday.

Hedge funds were believed to have pressed sales on the counter following the results. Market talk has it that brokerage Credit Lyonnais Securities offloaded in Infosys on behalf of some hedge fund. Hedge funds are short term investors who get in and out of the stock markets very fast.

In addition, there was heavy delivery based activity in Infosys, averaging 32% of volumes on NSE in the two days following the results. On Thursday, the deliverable quantity of shares in Infosys on NSE was 1.05 million shares out of total volumes of 3.29 million shares, implying a solid 32% in delivery based trades. On Friday, the deliverable position in the stock on NSE was 1.38 million shares out of the total 4.32 million Infosys shares traded, again 32%.

Over the previous few sessions between 1 March 2003 and 9 April 2003, deliverable trades in Infosys varied between 6% and 26%.

For the Infosys stock, it was a clear case of expectations being belied. The market was expecting a substantially higher earnings guidance of 20%-plus from the software bellwether and certainly not the 11.3%-12.7% guidance that Infosys eventually gave.

Margin calls were also said to have been triggered in the stock following the massive slump. Margin calls take place when financiers, who lend money against a stock, offload the stock when it slips below a certain limit. Usually, when a stock witnesses a sharp slide, financiers demand additional margins. If the investor is unable to cough up the additional margin, financiers sell the stock.

Following the muted Infosys guidance, market men have turned cautious on the broad spectrum of IT stocks. Even after the two-day 37% fall (to the Rs 2,600-level) in Infosys, the market feels the stock could will detract further to the Rs 2,100-level.

Yet IT analysts say the market has overreacted as far as Infosys is concerned. They think that, after having fallen so much, the stock is now a value buy . At the current Rs 2,617.50, the scrip discounts its projected FY 2003-04 earning per share of Rs 162 (middle of the range of Rs 161-163 that Infosys has given) by a price to earnings multiple of 16.1.

Pressure on billing rates and its impact on profit margins has led Infosys to come out with a muted earnings guidance for FY 2003-04. For FY 2003-04, Infosys expects an EPS of between Rs 161 and Rs 163, translating into 11.3% to 12.7% growth in bottom line on a year-on-year basis. It expects income from software development services and products to be in the range of Rs 4,408-4,479 crore (Rs 44.08-44.79 billion) translating into a 21.7% to 23.6% growth on a year-on-year basis.

Infosys is witnessing margin pressure due to the challenging external environment including the recession in the US economy and competition even as top line growth remains strong on the back of volume growth. Infosys' management indicated that the billing pressure in the fourth quarter was very intense and it expects the pressure to continue during the year ending 31 March 2004. Also, the incidence of the SARS virus in Asia has led to cancellation of visits by some clients.

The Q4 results were also dismal, being on the lower side of expectations. For the fourth quarter, the Bangalore-based company posted a 23% rise in net profit to Rs 259 crore (Rs 2.59 billion) on net sales of Rs 1,020 crore (Rs 10.2 billion). The company's quarterly net profit growth of 23% was on the lower side of predictions by a capitalmarket.com poll - a 23-33.6% rise in net profit to Rs 259-281 crore (Rs 2.59-2.81 billion) and sales of between Rs 980 crore (Rs 9.8 billion) and Rs 1,043 crore (Rs 10.43 billion), up 44-53.3%.

Another reason for the pressure on margins is that the share of on-site revenues may continue to remain high due to new project starts. The margins on on-site projects are lower than those in offshore ones. Also, the incidence of the SARS virus in Asia has led to cancellation of visits by some clients.

Analysts see Infosys' billing rates remain under pressure in the coming months.

BSE code: 500209