Infosys shares dropped sharply Wednesday after global brokerage major CLSA's sales team said share prices can fall up to 40 per cent from current levels. CLSA has an "underweight" call on the software services exporter.
The Street's expectations on margins and earnings do not discount a price war, which could lead to downsides, CLSA's sales team said in a note. Indian IT services companies are aggressively going after big contracts, which have adversely affected billing rates. Offshore billing rates have gone down to $14 per hour against $18-22 per hour, the note said.
A de-rating can bring Infosys price earnings multiple down from 14-times to 10-times, the note added.
Infosys shares closed 1.2 per cent lower at Rs 2,578 on the NSE. Infosys, which has disappointed investors over the last two quarters, will report its second quarter earnings ending September 30 next week.
According to the note, IT companies may continue to face headwinds because of the rise in the rupee. The rupee has seen sharp gains in September and is trading at a five-month high. A rise in the value of rupee adversely affects earnings of IT firms, who earn their revenue in dollars. Most IT firms, including Infosys, follow hedging strategies to minimise losses on account of volatility in foreign exchange movements.
Infosys shares have witnessed sharp gains over the past month because of attractive valuations and better earnings visibility. The stock has jumped over 9 per cent since September 3 in contrast to 5 per cent gains in the broader BSE IT index.
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