Infosys: The outlook is cautious

With pricing pressures unlikely to abate in a hurry, Infosys says operating margins could come off by 300 basis points in 2009-10.

Despite the weak rupee, Infosys says it’s earnings per share (eps) will be anywhere between 3-6.7 per cent lower in 2009-10 levels compared with the Rs 104.60 per share that it posted in 2008-09.

That’s a somewhat disappointing number and below the Street’s expectations, which had been hoping for a guidance of around Rs 102 per share. Obviously, pricing pressures are huge—-pricing has come off by about 3 per cent in the March 2009 quarter and the Infosys management says prices could fall a sharp 6-6.5 per cent this year.

Besides, with a good 69 per cent of its existing customers having trimmed their IT budgets by about 10 per cent, volumes too could be weaker. In a difficult environment, business from new clients is understandably harder to come by and taking far longer than it did earlier.

Which is why the tech major has announced a fairly conservative dollar revenue outlook: revenues for 2009-10 will be lower by 3-7 per cent over 2008-09 levels.

Again, the Street had been hoping for less of a drop, closer to 3-4 per cent which is why the Infosys stock opened sharply lower in Wednesday’s trading session.

The weak top line will obviously pressure the operating margins: the opm fell 150 basis points sequentially in the March 2009 quarter to 33.6 per cent and for 2009-10 it is likely to drop by about 300 basis points.

That’s despite the fact that Infosys doesn’t plans to increase wages and salaries though it wants to spend a little more on marketing.

The management intends to go ahead with its hiring plans –it says it will recruit the 18,000 people it had intended to. However, since it could lose around 10,000 people, it could end up with 8000 net additions.

Unless there is a recovery in the environment in the second half of the year and billing rates move up again, margins will stay weak. The good news is that the company has strong cash reserves of over $2.2 billion which could come in handy for an acquisition.

At Rs 1370, the stock trades at just under 14 times earning and is unlikely to see a re-rating in the near term. In fact, it could retrace to lower levels of around Rs 1,250 in the near term, trading at around12 .5 times.