Infosys: Green shoots grow roots

The December 2009 quarter Infosys results seem to indicate that the green shoots of the last quarter are growing well. Q3 revenues clocked in at Rs 5,741 crore, nearly 5% over the top end of its guidance for the quarter. The IT bellwether bounced up about 4% intra-day so far and gave a green signal to most of the other large cap IT counters. The BSE IT index was also up 3.8% while the Sensex was nearly flat.

On a constant currency basis, revenues bounced up nearly 7% sequentially (over Q2FY10) and over 5% yoy to $1232 million, against a guidance of a 1.4-0.5% dip. Net profit grew almost 3% over the September 2009 quarter to Rs 1,582 crore, but clocked in about 4% below Q3 numbers last year, hit by  a 3.7%  rupee appreciation in the quarter and higher employee expenses. In spite of these factors, operating margins expanded 90 basis points sequentially and 40 basis points yoy to 35.5%, as growth moved into a higher gear.

Management speak was distinctly more positive than in previous quarters as S Gopalakrishnan, CEO and Managing Director, stated in a press release that he expected offshore outsourcing to benefit from the recovery, which, he added, was led by the US and the financial services vertical. Revenues from top 10 clients grew about 12% in the quarter and management indicated that client decision-making was faster now.

Demand strength is reflected in the employee utilisation levels of 76%, up 3% q-o-q, according to the company. Infosys added nearly 4,500 employees (net adds) this quarter.

The positivity is filtering down to its FY10 revenue growth guidance which has been revised upwards to 3.6-3.8% y-o-y, from 1.2-1.7% earlier, with the rupee estimated at Rs 45.75 to the US dollar on average for Q4FY10. In constant currency terms, revenues for Q4 FY10 are expected to clock in a growth of 10.6%-11.5%. Guidance for Q4 is much more muted with rupee revenues expected to stay almost flat – 0.7%-1.55% growth, impacted mainly by rupee hardening and higher employee costs in what is usually a softer quarter according to the management.

The cautious note is also because most companies finalise budgets around February which is when greater clarity will emerge. However, analysts expect that it will beat these estimates comfortably again, "under-promise and over-deliver" becoming something of a mantra with Infosys.

The counter is currently trading at Rs 2581, at a P/E valuation of 22x to consensus analyst one year (FY11) forward earnings. It has seen about 11 earnings upgrades in the last month.