Infosys: Disappointing quarter

Revenues have come in below street expectations, with guidance still cautious about the global demand.

Infosys Technologies reported revenues of Rs 7,106 crore for the third quarter ended December 2010, about 2.2 per cent above the upper level of the guidance given in the last quarter.

Revenues in dollar terms recorded six per cent sequential growth at $1,585 million. Volumes increased 3.1 per cent sequentially. The 3.5 per cent sequential rise in the rupee against the dollar dragged down the margins by 1.5 per cent. However, it was negated by a 1.6 per cent increase in pricing. Margins were stable at 30.2 per cent, as net profit grew about 2.5 per cent sequentially and 14 per cent year-on-year to Rs 1,780 crore.

The company has guided for a muted 1-1.7 per cent sequential revenue growth for the next quarter. A key dampener was the relatively cautious commentary on the business outlook. Chief Executive Officer and Managing Director S Gopalakrishnan continued to emphasise the risks arising from the weaker economic recovery and sovereign default on demand. However, the management clarified the prevailing environment suggested a normal year ahead, with growth in the mid-to-high teens. It also indicated price increases were unlikely in the coming quarter.

In terms of verticals, revenue contribution from the banking, financial sevices and insurance segment continued to expand, with manufacturing and retail also stepping up. The management said it was positive on the business from North America, but was negative on Europe, though revenue contribution from the continent had been stable sequentially. The company has managed to rope in almost 40 new clients during the quarter, of which nine fall in the $50-million bracket. However, the management indicated the client project spend was still largely short-term focused, which added to the volatility in the environment. Infosys expects the rupee to stay soft, given the current account deficit pressure, and will continue with its usual hedging policy.

Runaway expectations (with the stock outperforming the Sensex by seven per cent in last one month) were bound to be hit. The stock ended 4.82 per cent lower at Rs 3,212.3 and trades at an expensive valuation of 21.5 times the consensus 2011-12 earnings per share estimates.