Infosys shares recovered from the lower levels in early afternoon trades. The scrip was up 0.5% on BSE in early afternoon trade to Rs 2,945. The scrip recovered sharply from the lower levels. It fell as much as 2.3% earlier during the day to a low of Rs 2,861.15. 230,000 shares changed hands in the counter on BSE.

The stock witnessed bargain hunting that followed a two-day 37% slump in the counter triggered by a muted FY 2004 guidance issued by the company on 10 April 2003. Infosys lost 37% in mere two trading sessions to settle at Rs 2,617.50 on 11 April 2003, from its close of Rs 4,158.05 on 9 April 2003. Bargain hunting saw the scrip surged 15.5% in the next two trading sessions to Rs 3,025.40 on 16 April 2003. However, the stock has failed to sustain higher level and it slide to a low of Rs 2,931.15 on 21 April 2003.

On 10 April 2003, Infosys gave a muted guidance for FY 2004 citing pressure on billing rates. For FY 2004, Infosys expects an EPS of between Rs 161 and Rs 163, translating into an 11.3% to 12.7% growth in the bottom line on a year-on-year basis. That's lower than a 19% growth in EPS to Rs 144.60 for FY 2003. It expects income from software development services and products to be in the range of Rs 4,408 crore-Rs 4,479 crore, translating into a 21.7%-23.6% growth on a year-on-year basis.

The Q4 results were also 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 quarterly net profit growth of 23% was on the lower side of predictions by a capitalmarket.com poll of tech analysts -- 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%.

The sharp post-results setback in the Infosys counter reflects the downward re-rating of the stock. With such muted earnings guidance, the stock is paring the otherwise rich valuation that it commanded on the bourses. In a few week to the run-up to the Q4 March 2003 and FY 2003 results, the Infosys stock traded in band of a high of a low of Rs 4,000-Rs 4,400. The market was expecting the company to give a guidance of an EPS of about Rs 175-Rs 180 for FY 2004. When the Infosys stock was quoted in the Rs 4000-Rs 4400 band ahead of the results, the scrip discounted its projected FY 2004 EPS of roughly Rs 177.50 (which is the average of the expected EPS range of Rs 175-Rs 180 for FY 2004) by a PE multiple of between 22.50-24.70. At its current level of Rs 2,945, the stock discounts its projected FY 2004 ESP of Rs 162 (average of the company's EPS guidance of Rs 161-Rs 163) by a much lower PE multiple of 18.1.

The stormy weather through which Infosys is sailing is a showcase of how economic slowdown in the US has affected the Indian IT sector. With recession starring in the face, US clients are engaged in tough bargaining with IT companies, putting pressure on billing rates. Some of the US companies have set up in-house operations. Competition is also hotting up for Indian IT firms with some of the foreign companies setting up shops in India.

While billing rates are falling, costs are up, thereby squeezing the profit margin. A healthy volume growth requires employee additions, and increments and promotions to the existing staff. Increase in sales and marketing expenses and stretching of sales cycle are putting additional pressure on margin.

On the flip side, the volume growth remains fairly healthy as the India story remains in tact with local IT companies displaying strength in cost-competitiveness and proven delivery capabilities. Nevertheless, analysts expect a further pressure on billing rates of IT companies in the coming months, given the current tough scenario.

'Infosys remains a first class company. Its woes centre around weak external enviornment', says an IT analyst with a local brokerage.

BSE code: 500209