Setting a positive tone for the IT sector's quarterly earnings performance, Infosys Technologies, India's second-largest IT services provider, marginally beat market expectations to post a 7.5 per cent increase in consolidated (Indian GAAP) net profit to touch Rs 1,540 crore for the second quarter ended September 30, 2009 against the corresponding period of the last financial year. Its top-line grew 3 per cent to touch Rs 5,585 crore.

Compared to the trailing quarter, the company's net profit moved up a shade under 1 per cent and its top-line rose 2 per cent.

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Net profit margins improved 114 basis points year-on-year, but declined 33 basis points sequentially to 27.6 per cent, due to a higher tax outgo for the quarter. Moreover, since more work moved offshore (that is, on Indian shores), the company could record a 3 per cent gain.

Under US-GAAP, however, revenues in the second quarter fell 5.1 per cent to $1.154 billion from $1.216 billion a year earlier, while net profit after tax declined 0.9 per cent to $317 million from $320 million. Infosys recorded sequential revenue growth in US dollar terms, after witnessing a decline for the last three quarters.

"Clients are looking to invest in a few strategic initiatives and relationships to maximise value from opportunities when the economic downturn ends," Infosys CEO S Gopalakrishnan told reporters here today.

The markets initially reacted positively to his assertion that the business climate has improved. The Infosys stock opened around 1.6 per cent higher than its previous closing figure, but ended the day at Rs 2,178.35 — around 1.5 per cent down on the Bombay Stock Exchange.

Analysts attributed the fall to currency volatility (the strengthening rupee against the US dollar) which could significantly affect Infosys' margins in the coming two quarters. Besides, analysts say the Infosys stock is currently valued at 22 times its earnings, which decreases the attraction of holding the stock.

Infosys has indicated that its third quarter (October-December 2009) revenues would see a decline of 1 to 2 per cent on a year-on-year basis, while its year-end revenues would also dip by 1-1.3 per cent.

However, the fall is lower than previously forecast. Dipen Shah, Sr Vice President (PCG–Research) of Kotak Securities, said “Infosys’ results were very much in line on the revenue front. The bottom-line was higher than expectations because of better-than-expected EBIDTA margins. The increase in guidance is encouraging but comes partly because of cross-currency fluctuations.”

Rajiv Mehta, IT Analyst, India Infoline, agreed that "the numbers are fairly good and in line with market expectations and so is the guidance". The concern, he added, only remains on the rupee-dollar volatility. Despite the rupee moving up the company has not increased its hedging. With $700 million as its hedged position I think Infosys is the least hedged when compared with Tata Consultancy Services (TCS) and Wipro. The management has also said they will take the hedging view for the next two quarters and "I think that is a concern", he added. Infosys added 35 clients to its portfolio in the quarter under review (27 in the trailing quarter).

Six clients of these were from the Banking, Financial Services and Insurance (BFSI) sector which now accounts for 33.5 per cent of the company's revenue (33 per cent in the trailing quarter).

However, the telecom and manufacturing verticals registered marginal decline in revenue while revenue from the retail segment showed significant improvement (almost a 1 per cent increase).

With the US dollar depreciating against other currencies, Infosys registered a 1.6 per cent gain in margins. But currency volatility is a continuing concern for the IT sector which get over 95 per cent of its revenues from exports. Anil Advani, Head of Research SBICAP Securities, concurred that the company has managed well despite cross currency volatility and other macro concerns and "the only concern is the rupee movement". I do not believe with the view that the company is under-hedged. With so much of volatility it's difficult to judge, he added.

"Extreme volatility has affected not just the rupee, but is a phenomenon cutting across currencies. Cross-currency movements were to the tune of 10 per cent in Q2. On the hedging front, we continue to take a short-term view," indicated Chief Financial Officer V Balakrishnan. Infosys increased its hedges to $699 million in Q2, as against $598 million in the June quarter.
 

Infosys is also "scouting for smaller acquisitions" since it has $2.8 billion (around Rs 13,000 crore) as cash in hand. The company, says its management, will look for "strategic acquisitions".

However, for the next two quarters (Q3 and Q4), the company's operating margins would be impacted by around 200 basis points (bps) due to salary hike implementation. From October 1 this year, Infosys has raised its offshore employees salaries by an average of 8 per cent. Onsite employees received an average wage increase of 2 per cent.

Infosys will also hire 2,000 additional employees (mostly experienced hands) to take the total hiring figure for FY10 to 20,000. Infosys and its subsidiaries had a gross addition of 6,069 employees (which amounts to a net addition of 1,548). As of September 30, the number of employees increased to 1,06,000.

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