Infosys: Business blues

The lower dollar guidance indicates that the environment could become more challenging.

It’s not surprising that the Infosys management has chosen to be cautious in a difficult environment . The tech major has tempered expectations by lowering the guidance for the earnings per share (eps) for FY09 in dollar terms from $2.32-2.36 to $2.24. That’s down by about 5 per cent and means that earnings will now grow by 10 per cent in the current year, against 14-16 per cent expected earlier.

This is probably the first time Infosys has scaled back its guidance both for revenues and profits---the revenue guidance is now down from $5.05 billion to $4.72--4.81 billion, again lower by about five per cent implying that dollar revenues will grow by about 15 per cent in FY09 compared with the 19-21 per cent expected earlier.

Part of the downgrade is because the dollar has appreciated against European currencies. But, given the way the global financial crisis is unfolding, spends on IT are going to come off as the major global economies slip into a recession. Moreover, since Indian vendors have a fairly high exposure to the banking and financial services space, they are currently very vulnerable given the number of bankruptcies and near-failures.

As the Infosys management has pointed out many of the companies that it services are seeing changing leadership and, therefore, decision-making could be delayed. The guidance indicates that growth will be flat in the next two quarters and it could be a while before things begin to look up.

Billing rates have been stable so far which, together with a weaker rupee, is why the Q2FY09 numbers were a tad better than expectations — revenues up 11.6 per cent sequentially at Rs 5,418 crore and the operating profit margin up 265 basis points at 33.1 per cent, resulting in a rise in the net profit of 10 per cent to Rs 1,432 crore.

However, pricing pressures could surface and moreover, volumes too could suffer in a difficult environment—though volumes grew 6 per cent in the September quarter. Infosys seems to be bagging orders — it added 40 clients in the quarter. The management says its hiring plans are on track—it added 10,000 people last quarter. It will add 4,500 people in the December quarter and 25,000 this year.

So, while it may not be business as usual, the outlook isn’t that gloomy either. At Rs 1227,the stock trades at 12 times estimated FY09 earnings. However, the Street is focussed on the dollar earnings and since they will grow at just 10 per cent this year, the upside for the stock is likely to be capped.