Infosys Q3 net rises14.2% to 1,780 crore

Lower-than-expected earnings blamed on wage costs, currency fluctuation & European woes

INFOSYS Technologies raised fresh concerns over the pace and depth of recovery in the IT sector by reporting lower-than-expected third quarter earnings due to wage costs, currency fluctuations and sluggish European economic growth.
    The first among its peers Tata Consultancy Services and Wipro to announce earnings, investors and experts tracking the sector take cues from Infosys' performance, which in many ways sets the agenda for the entire industry. While rival TCS will announce its December quarter earnings on Monday, Wipro is set to report its third quarter results on January 21.
    "There is an overhang of sovereign debt in Europe, uncertainty over economic environment, unemployment is high," said Infosys CEO S Gopalakrishnan. "In Europe the volatility is high, reflected in the currency and if something bad happens the repercussions are global like when Lehman failed. So that's what we have to worry about and what we are seeing because of that is project sizes coming down and clients focusing on the short term," Gopalakrishnan added.
    In rupee terms, Infosys posted October to December quarter revenues of 7,106 crore, lower than 7,241 crore Morgan Stanley had forecast.
    Investors, alarmed by the company's comments on a weak economic recovery, dragged Infosys shares on the BSE during morning trade on Thursday by nearly 4% to 3,232.10. Infosys shares closed down by 4.82% at 3,212.30 on the BSE. Shares in TCS closed at 1,124.20, down by 1%. The third-biggest software exporter Wipro also saw its shares drop by almost 2.67% to 455.
    Top outsourcing customers such as JP Morgan and Bank of America, apart from automakers, are struggling to grow business and are turning cautious in their spending. Infosys numbers a 'negative surprise'
    THE company posted lower-thanexpected 2.5% growth in net profit to 1,780 crore for the third quarter ending December. From a year earlier, the net profit grew by 14.2%. Top analyst firms and brokerage houses had forecast 3-5% rise in net profit. The company reported third quarter revenues of $1.585 billion, lower than $1.606 billion expected by brokerage firms. Some analysts, such as Rumit Dugar, Manoj Singla and Udit Garg of Religare, said Infosys numbers brought a negative surprise. "Infosys results and management commentary highlight the macro risks and soft volume traction is a negative surprise," the Religare analysts said in their note after the company announced its results.
    They added that even TCS and Wipro could provide similar commentary. "We believe that TCS and Wipro could see similar volume challenges and EPS growth to be largely in line with Infosys. Additionally we believe results also indicate that earnings expectations remain high," they added.
    Others such as Ganesh Duvvuri, VP, institutional equities (research) at Edelweiss Capital, said third quarter volume growth of 3.1% was the lowest for the company in the past five quarters.
    "As it managed to get pricing increases, it seems like it is focusing yet again on profitability as against growth. Its Q4FY11 revenue growth guidance of 2% quarter-on-quarter in dollar terms also seems to indicate that it is probably walking away from some existing large client, which is not meeting its margin threshold," Duvvuri said.
    Infosys also revised its revenue guidance for the year upwards, and said the revenues for year ending March 2011 would be in the range of 27,408-27,481 crore, as it hopes that customers will give more outsourcing orders after the vacation. Since April last year, Infosys has revised its revenue guidance every financial quarter.
    "For a stock touching new life highs every day, results need to come at the top end of street expectations, not struggle to meet them. By that yardstick, Infosys' December quarter report leaves much to be desired," CLSA analysts said in a report after the company announced its earnings.
    Coming out of last year's recession, investors were hoping Infosys to grow its December quarter revenues by 5-7% and also improve operating margins. This could have set the tone for the entire industry. "Somewhere, the order flow bullishness from the sector has been lost in translation when we compare Infosys numbers to what could have been, or what we reasonably expect from its larger peer TCS come Monday evening," the CLSA analysts said. "Firstly, it quietens things down somewhat. We have noticed an urge to not only invest in the toptier stocks in the sector, but also go down the chain to mid-caps. A dose of realism comes handy here. Secondly, making money in Indian IT is a longer waiting game than before," the analysts added. Infosys, which counts BT among its top customers, saw its revenues from telecom clients drop to 12.5% of the total revenues, much lower than 16.2% such customers contributed a year ago.
    Despite an overall recovery in outsourcing spend predicted by top analysts, Europe continues to drag prospects of vendors such as Infosys. The company, which counts ABN Amro and BP Plc among its top customers from the region, was hit by 6.3% growth in business from Europe — lower than 18% growth during the September quarter last year. Brokerage firms Citi and Kotak expect the top three Indian software exporters to register 5-7% sequential revenue growth. Investors had forecast TCS and Infosys to post 27-28% and 31-33% operating margin, respectively, for the quarter ending December. An appreciating rupee, which rose by 3.5% against the US dollar ensured that Infosys' operating margin, a measure of profitability, remained unchanged from the second quarter. The company's margins have come down from almost 35.5% during the December quarter of 2009 to 30.2% in the third quarter this year. Brokerage firms such as CLSA had expected Infosys' margins to improve by around 0.7% during the period.
    With around 1,27,779 employees on its payroll, Infosys will decide on wage hikes over the next three months. Last year, the company had given 17% hikes. The company added 5,311 new staff during the third quarter.