Infosys: Rupee windfall changes sentiment

Depreciation turned out more beneficial than estimates, boosting margins, outlook.

While cross-currency movements marginally dampened Infosys’ dollar revenues and top line outlook, the depreciating rupee significantly raised the tenor of its performance after about four quarters of serial disappointments.

The IT major’s rupee revenue growth of over eight per cent in the June quarter was higher than Street estimates and sent the stock zooming seven per cent on Wednesday. The rupee dip tailwind translated into an expansion of 210 basis points in operating margins to 28.2 per cent, against the guidance of flattish margins given in the previous quarter. Net profit increased 11 per cent quarter-on-quarter and 10 per cent year-on-year.

A volume growth of 4.5 per cent came in and a pricing impact of one per cent translated into a 5 per cent revenue growth on a constant currency basis, to $1.75 billion. Though offshore realisations were 3.4 per cent higher on a constant currency basis, blended pricing was just 0.5 per cent and the management emphasised there were no material pricing or volume changes.

On an average, the rupee was 2.3 per cent lower this quarter, settling at Rs 48.97 to the dollar in September, and 9 per cent lower on year. Based on this, the company increased its FY12 revenue guidance by 5.5 per cent over what it had said in June, translating into a 22-24 per cent annual growth. A weak rupee has boosted the operating margin outlook by 150 bps, and chief financial officer V Balakrishnan has said the cumulative negative impact on operating margins for FY12 would be restricted to 50-100 bps on year, compared to a contraction of 250 bps expected earlier. For the December quarter, the rupee revenue guidance is distinctly more upbeat on a 9-11 per cent q-o-q growth and 15-17.5 per cent growth in earnings per share (EPS).

Though Infosys saw strong growth across key segments and industries, it continued with a cautious tone to its commentary on business outlook. The management assured the company had seen no budget or project cuts from clients, but added clients were not taking long-term decisions and were scrutinising larger decisions cautiously. This, the management believes, could impact budgets next year.

The company planned to stay true to its pursuit of quality growth with profitability margins maintained within a tight range, said Balakrishnan, negating any suggestion of Infosys reverting to an aggressive pricing strategy.

A softening rupee brings fair winds for the sector, improving competitiveness for Indian players. In a hardening economic environment, every bit counts. The performance of peers and the commentary on IT budgets in December will be key factors to monitor, going forward.