Infosys posts 15.7% y-o-y net profit in first quarter

Muted guidance, yet again, fails to cheer the market; drags stock prices.

Infosys, India’s second-largest information technology (IT) services company, on Tuesday started the financial year 2012 earnings season with cautious note, even as the company posted a 15.7 per cent increase in its net profit for the quarter ended June 30, at Rs 1,722 crore compared to the corresponding period last quarter.

The Bangalore-based company, which counts global companies such as American Express, BP and Bank of America as its clients, saw its revenues for the quarter grow 20.8 per cent to Rs 7,485 crore on year-on-year (y-o-y) basis driven by a favourable currency trends, flat to upward pricing environment and increasing traction in North America, its biggest market so far.

On a sequential quarter basis (when compared with the trailing quarter), Infosys posted a 5.3 per cent decline in net profit, and its revenues went up 3.2 per cent.

The company said the q-o-q net profit got negatively impacted due to the compensation rise it gave to the employees.

Even though the company met street expectations on most of the parameters, while giving its outlook for the next quarter and full year, Infosys was quite conservative which was evident from the comments made by its senior executives.

"Our performance clearly indicates that there is a momentum at this point of time. However, there is some volatility in certain markets and there might be delays in IT spending by the clients for which we need to be cautious,” said S Gopalakrishnan (popularly known as Kris), CEO and MD.

The company has given a revenue guidance in the range of Rs 7,699 crore and Rs 7,810 crore for the quarter ending September 30, which is a y-o-y growth of 10.8 to 12.4 per cent.

Earning per share (EPS) is expected to be in the range of Rs 29.64 and Rs 30.15, a y-o-y decline of 2.5 per cent to 0.9 per cent. Revenues for the year ending March 31, 2012, are expected to be in the range of Rs 31,777 crore and Rs 32,311 crore, a y-o-y growth of 15.5 per cent to 17.5 per cent.

“Infosys results were marginally higher than our estimates. The company has taken a conservative view of the macro scene and the possible impact on the pace of client spending, while giving its 2011-12 guidance. It has not seen any budget or pricing cuts from clients, as yet. The large deals and transformational deals continue to flow and this is encouraging,” said Dipen Shah, senior vice-president (Private Client Group Research), Kotak Securities.

Added Pralay Das of Elara Capital, “I am disappointed with the numbers, both in terms of guidance and volume growth they are expecting. There seems to be a disconnect between the numbers the company plans to hire and the business they are getting."

The company's numbers, yet again, disappointed the market. Infosys stock price went down almost 4.27 per cent at the end of the day’s trading in the Bombay Stock Exchange. In the quarter under review, the company saw a four per cent spike in volume even though the operating margin was about 26 per cent, at least three percentage points down from the previous financial year's 29.5 per cent.

“The margin got negatively impacted because of the wage rise, currency volatility and lower employees’ utilisation. As we go on, we expect some benefits from currency, and which is why we are expecting the operating margin for the full year to be 27 per cent, down by 2.5 per cent as reported in 2011,” said V Balakrishnan, CFO and board member.

Infosys’ utilisation for the quarter (excluding trainees) stood at 74.9 per cent as compared to 78.7 per cent reported in the same period a year ago. The company said it was creating a bench (pool of reserve employees) to prepare itself for the future opportunities.

“It’s a temporary phenomenon as we are hiring a large number of freshers. The utilisation is a little low at the moment and our effort is to keep it between 78 and 80 per cent,” said S D Shibulal, COO.

Analysts’ community feels that Infosys strategy to keep utilisation low is the right strategy looking at the present environment. "While the utilisation is low, I think the company's strategy to have a larger bench seems to be right. In future, if they get called for any large deals, they should be able not to lose it just because they do not have enough people,” said Ajay Parmar, Head, Institutional Research, Emkay Global.

In the quarter, Infosys and its subsidiaries added 9,922 employees (net addition of 2,740) on a gross basis which took it’s headcount to 1,33,560. The company saw some solace in its attrition which came down to 15.8 per cent from 17 per cent in the previous quarter.