Infosys disappoints with 2.4% net fall

Company raises full-year revenue guidance on greater demand, analysts stay upbeat on stock.

India’s second-largest software services exporter, Infosys Technologies, today stumped the markets by reporting a lower-than-expected net profit. It, however, increased its full-year revenue prediction.

The Infosys management attributed the net profit fall to continuing pressure from the European region, currency volatility, pricing pulls, and the burden of increased tax and wage hikes.

Its consolidated net profit dropped 2.4 per cent to Rs 1,488 crore for the quarter ended June 30, compared to the corresponding quarter last year. Sequentially (compared to the trailing January-March quarter), its net was down by 7 per cent as against Rs 1,600 crore. Infosys' revenues, however, grew by 13.3 per cent year-on-year to Rs 6,198 crore. Sequential growth in revenues, though, was just 4.3 per cent.

In dollar terms, though, Infosys' consolidated profit after tax (PAT) was up 4.2 per cent at $326 million year-on-year (YoY). On a sequential basis, it was down 6.6 per cent from $349 million. Revenue for the company at $1,358 million was up 21 per cent Y-o-Y, while it reported a revenue growth of 4.8 per cent sequentially from $1,296 million.

Infosys also managed to beat its quarterly revenue guidance — ranging between Rs 5,919 crore and Rs 5,963 crore. However, investors — who had put the company on a pedestal on July 12 on higher expectations — could not hide their disappointment.

The Infosys stock lost 3.72 per cent to close at Rs 2,787 on the Bombay Stock Exchange (BSE) today. Most IT stocks were down with the IT index falling 2.84 per cent.

This despite Infosys posting a strong volume growth of 7.6 per cent — its highest since the second quarter of FY08 — and consequently increasing its full-year guidance. The company increased it growth guidance by 3 per cent to 19-21 per cent for FY11. However, earnings per share (EPS) guidance was revised up by 1 per cent due to higher margin pressures.

Nevertheless, analysts remain upbeat on the stock. Dipen Shah, senior vice-president, PCG Research, Kotak Securities, said: “On the operating side (Ebitda levels), results were in line with estimates. The lower-than-expected PAT was due to the higher-than-expected tax expenses and lower-than-expected other income. The US dollar revenue growth guidance reflects the higher confidence despite some concerns in the global economy. This increase in hiring guidance also reflects the growing optimism of the management.”

Rajiv Mehta, research analyst, India Private Client, IIFL, concurred that the pricing decline was only a tail effect of pricing renegotiations done with some clients in the previous quarters. He added that the margin performance was in line with expectations. "We expect margins to improve by 100-150 basis points (bps) in the remaining three quarters. Net profit fall driven by the margin decline and higher tax rate. We maintain Infosys as our top pick in the sector with a target price of Rs 3,230.”

Meanwhile, the Infosys management is confident of the future. “While the global economic environment remains uncertain, we continue to see greater demand for services from our clients,” said Infosys Chief Executive Officer and Managing Director S Gopalakrishnan. "The challenge for the industry is to enhance the investment to grow the business, given the uncertainty in the environment.”

Infosys, which now services over 550 customers ranging from ABN Amro and Goldman Sachs to Telstra and BP, saw growth in business volumes but the effects of rupee depreciation dragged down operating margins by at least 60 bps. Operating margins, after accounting for depreciation, fell 1.8 per cent to 28.3 per cent. “Currency volatility is indeed a concern,” admitted Gopalakrishnan.

Chief Operating Officer S D Shibulal noted that while there has been concern that demand from Europe would continue to be weak, the company has been seeing traction from European clients across segments. Infosys has increasingly targeted the European, Chinese and Latin American markets after the US market slowed down following the global recession in 2008.
 

TRAILING ESTIMATES
	Q1 (Rs cr)	% growth Q-o-Q**	% growth Y-o-Y***
PAT	1,488	(7)*	-2.4
Revenue	6,188	4.3	13.3
* ( ): indicate dip in growth;    **: Q-o-Q (growth over quarter ended  March 31, ‘10);     *** Y-o-Y (growth over quarter ended June 30, ‘09)
HIGHLIGHTS
* 38 clients were added in Q1 (47 in Q4FY10)
* Net addition of 1,026 in Q1; Attrition around 16%
* Pricing under pressure from certain quarters
* Overall 114,822 employees as on June 30
* BFSI sector does well but concern over European crisis continues
* Sitting on $3.5 billion in cash; Rs 20 crore forex loss in Q1
* Strong volume growth of around 7% — highest since Q2FY08

Revenues from Europe fell to about 20 per cent from nearly 25 per cent a year ago and 23 per cent in the January-March period. “Since the recession impacted Europe after it hit North America, they will take longer to recover. We expect growth in Europe to be muted in the coming quarters,” said Gopalakrishnan.

Bangalore-headquartered Infosys will primarily seek to minimise the risk of the downside in European client spending by taking advantage of higher growth in other parts of the world as well, he said. "We expect that Europe will be eventually about one-third of business in the long run. At the same time, we expect some challenges in the medium term," Shibulal added.

Infosys forecast full-year profit margins to drop 150 bps on a decline in prices for its services and salary increases. Gopalakrishnan, however, said the company is not factoring in any pricing increase for the rest of calendar 2010. Infosys added 38 new clients and 1,026 staff on a net basis in April-June, its slowest pace of addition in four quarters, reflecting the general downtrend in new orders and cautious approach to economic recovery in key markets. The company had 1.15 lakh employees on its rolls at the end of the April-June quarter.