Infosys June 2009 results a worry, currency fluctuations cushion earnings

Infosys Technologies kicked off the earnings season on a positive note. Its results reflect a tough operating environment but exceeded its guidance and market expectations. The software major’s revenues declined by 2.9% over the preceding quarter to Rs 5,472 crore in the June 2009 quarter. Its net profit would have declined too but a 130% increase in other income kept net profit constant at Rs 1,915 crore. In dollar terms, its revenues declined by 0.1% sequentially and by 1.9% in constant currency terms.

Infosys has been billed as being conservative with its guidance, as seems apparent in this quarter too. In dollar terms, its revenues and profits both exceeded its guidance. But the rupee strengthened by 6% against the dollar, compared to the rate assumed in April 2009. If not for this, its revenues would have been much higher. Hence, it is better to view results in constant currency terms.

Appearing on CNBC, the company management said that the short to medium term will remain tough but that they are confident of the long term prospects. Their clients are undergoing several changes –restructuring, management changes, ownership changes- which is delaying decision making. They do not expect pricing pressure to return very soon.

Constant Currency shows worry lines
Constant currency reporting nets out the effect of fluctuating currency rates; they give investors an idea of how the business is performing, irrespective of fluctuating currencies. Multinational companies use this approach since they earn revenues in multiple countries and in multiple currencies. Infosys fits that definition well and gives a constant currency report in dollar terms. It pegs the revenue decline in the June 2009 quarter at 1.9% on a sequential basis. That is much worse than its reported numbers and is a reflection of the actual operating environment.

Still, its guidance has been met
The company’s reported revenues of Rs 5,472 crore, were closer to the upper range of its guidance of Rs 5,379 crore – Rs 5,480 crore. Its EPS was higher by 13% compared to the guidance, at Rs 26.66.

  • In dollar (IFRS) terms, it did even better. Revenues were $1.12bn against a guidance of $1.08bn-$1.10bn and its earnings per ADS was up 14.5% at $0.55.
  • The software company has revised its guidance downwards for the year, mainly as a result of changed currency expectations.

Infosys lowers 2009-10 guidance, but dollar guidance is up
Based on Indian accounting standards: it expects 2009-10 revenues in the range of Rs 21,416 crore–Rs 21,747 crore and EPS of Rs 94.59-Rs 96. At the upper end, the guidance is down 5%. The dollar-rupee exchange rate is responsible for the lowering, now taken at Rs 47.91, down 5% compared to that used in April 2009 guidance.

Here’s where the catch lies. The dollar guidance has been revised upwards, at the lower end of the range. Revenues are forecast in a range of $4.45bn-$4.52bn and earnings per ADS at $1.97-$2.00. That’s an upward revision of about 3% at the lower end.

This seems mainly due to expectations of the dollar weakening sharply against the Australian Dollar, Euro and GBP. That will mean that the company gets more dollars for revenues earned in these currencies. Nearly 22% of its revenues are from earnings billed in these three currencies. The company has revised its forecast exchange rates, to reflect a 6% increase in the Euro/USD rate and a 16-17% increase in the AUD/USD and GBP/USD rate.

While it is tempting to ignore the conservative outlook, the sharp change in exchange rates is not to be taken lightly. The tide can turn against the company in the coming quarters as much as it has benefited in the current one. Hence, it is better to look at the performance of the company in constant currency terms. But till the markets and investors continue to look at reported numbers, a sharp depreciation of the rupee and strengthening of these three foreign currencies will benefit Infosys and vice-versa. The share price is trading up by about 2.7% at Rs 1,723.

Get all the details of the Infosys results here and a neat snapshot is available in the factsheet.

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