Infosys meets $ guidance, but markets want more

Infosys Technologies reported its December quarter results today. Its share price was down by about 4% at the time of posting, as its results lagged market expectations.

In dollar terms, the company’s revenues rose 6% over the September quarter, to $1.6 billion and earnings per share rose by 6.1% to 69 cents per American Depositary Share (ADS). Its guidance at the upper end of the range was $1.6 billion for revenues and 67 cents for its EPS. Though its performance was a little better than this, the markets appear to have anticipated more, as the company is seen to be conservative while issuing its guidance.

In rupee terms, the company has suffered a bit due to foreign exchange volatility. Its sales rose by 2.1% to Rs 7,106 crore while its EPS rose by 2.4% to Rs 31.15. It had forecast revenues in the quarter to be Rs 6,953 crore and EPS at about Rs 30. Thus, exchange related volatility appears to have affected its rupee earnings.

In a televised press statement, the company management said that volume growth was 3.1% while price increases contributed 1.6%. Attrition has slowed down in the current quarter. The company expects next year to be a normal one but is worried about the economic conditions in Europe. This will affect the outlook for its clients based in this region or with linkages to this region. Thus, they may focus more on short term projects, which could cause some volatility in its own business.

The company has revised its earnings guidance upwards, for the full year. In rupee terms, annual sales growth for 2010-11, at the upper end of the guidance range, has been revised up to 20.8%, from 19.4% earlier while EPS is expected to rise by 9.1% compared to 7.4% earlier. In dollar terms, the company’s revenues are expected to rise by 26.1% compared to 26.8% and EPS is expected to rise by 13.5%, compared to 12.2% earlier. Its guidance indicates it expects a better than expected performance in the March quarter, on the earnings front.

The trend of slower growth in the December quarter is observed for the past few years. In general, the growth of September quarter over June, is significantly higher than that for the other quarters, in the range of 8-14%.In September 2010, the company’s strong client relationships, and past investments in information technology, helped Infosys to log a higher than normal growth.

Growth in net profit in the December 2010 quarter at 2.5% is also a far cry from the robust growth of 17% in the September 2010 quarter. In June 2010, the company’s net profit declined 7%, due to the uncertainty in the economic environment.

North America’s contribution to sales has fallen by about a percentage point, on a sequential basis. The management had said that this was not a concern and will come back to normal. Contribution from ‘rest of the world’ has gone up, however.
The contribution of the banking and financial services segment to revenues has risen, while that of telecom has fallen.
In absolute terms, the attrition rate has fallen for the company, on a sequential basis.

Healthy client addition at 40, however, augurs well for the future. This is in line with the addition in the previous quarters. Client relationships are key strength area. The company continues to focus on cross-selling, upping the revenue per client in the face of economic uncertainty and currency volatility. The staff strength of over 133,000 employees, gives the company to continue to take on large scale projects, at minimal cost, which has a positive impact on the profit.

Click here, to read the press releases, financial statements and fact sheet on the Infosys website.

(updated with more analysis)

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