Infy Back at IT with 9.7% Net Profit Rise

A WEAK RUPEE HELPS CO BEAT ESTIMATES; STOCK REBOUNDS

Infosys' second-quarter results and its forecast for the rest of the year beat expectations, leading the stock markets to conclude that India's second-largest software exporter and the IT services sector have regained the spring in their step. Helped by a strong dollar, the Bangalore-based company reported a 9.7% increase in profit for the three months to September and marginally lowered its guidance for the financial year ending March 2012. 
Even so, its shares and those of other technology service providers such as TCS, Wipro and HCL seemed energised — the first time in many quarters that the announcement of Infosys' results has evoked such a reaction. Investors pushed Infosys shares up 7% on BSE on Wednesday to close at . 2,679.35 — the biggest climb since May 2009. 
The results could be perceived as a vote of confidence in the new management of Infosys, which is just about settling down after a leadership transition that saw the exits of founder NR Narayana Murthy and K Dinesh, as well as its high-profile human resources head T Mohandas Pai. 
SD Shibulal, the new chief executive, was measured in his assessment of the market environment. 
"We need to remain cautious. We are seeing that clients are becoming cautious about investments. There are delays in decision-making. At the same time, we are not seeing project cancellations," he said. 
Infosys' earnings helped the benchmark BSE Sensex advance 2.6% while shares in rival TCS and Wipro closed up 3.66% and 2.71%, respectively, reflecting the overall buoyant mood in India's $76-billion IT sector. Infy's Sales Machine Going Full Throttle 
The software major's sales machine seems to be operating at full throttle, winning 45 new clients during the quarter, the best performance in a year and a half. Costs, too, have been kept on a tight leash, rising just 3.6% sequentially while revenue growth was 8.2%. 
Another reason the rest of the year looks good for Infosys is the spending pattern of clients has changed. While earlier, spending would be front-loaded, this time it is more evenly spread, meaning the traditionally weak latter half of the year will now be stronger. 
"This year is an abnormal year. In a normal year, you always see growth being front-loaded. The growth (this year) is going to be evenly spread out because it is an abnormal year," CFO V Balakrishnan said. 
Infosys' net profit for July to September rose 9.7% to Rs 1,906 crore. Revenues for the second quarter grew 16.6% to Rs 8,099 crore. 
As projected by most brokerage firms, Infosys also lowered its revenue forecast for the year ending March 2012 by around 1%. Infosys' second-quarter earnings marked its return to nearly double-digit growth after three quarters of disappointing numbers, but macroeconomic worries in the US and the European debt crisis forced the company to lower its revenue forecast for 2012 from 18-20% projected earlier to 17.1-19.1%. "If the world goes through a slower growth phase, then it is ok for us. Clients will focus more and more on operating efficiencies, how to increase revenue etc. Those are sweet spots for us. If the world goes into a double dip like in 2008, then you have a problem. Pricing and volume growth could get affected," Balakrishnan said. 
Infosys, which has lost a quarter of its market value this year (now at $27 billion), has been lagging rivals TCS and Cognizant in both revenue and profit growth over the past 3-4 quarters. 
Long used to being the bellwether for the IT services sector, Infosys' status as the most preferred technology stock has been challenged in recent months. Market leader TCS hasbeen growing its revenues and margins at a faster pace while Cognizant has been clocking growth rates that Infosys saw in its heyday. 
Balakrishnan, therefore, was obviously pleased by the stock market's reaction to his company's results. 
"Maybe the markets think we performed like Sachin Tendulkar. This is what matters," he said, with reference to his comment last quarter on how the market had come to expect Infosys to perform like the ace batsman every quarter.
But others, such as Nimish Joshi of brokerage house CLSA, were less upbeat. 
"Most of the positive reaction is in contrast with much deeper negative sentiments already built in the Infosys stock over past few quarters - it can only move up from here," said an analyst with a multinational brokerage house based in Mumbai. During the first quarter ended March this year, investors dragged Infosys shares down 4.3% after the company said its net profit for April to June fell sequentially over 5%. 
"Upward revision of EPS guidance to Rs 143-145 (driven by a benign currency assumption) will excite a section of the street. However, we see these revisions as late re-alignments versus the rally seen across tech stocks in the last three weeks," Joshi and his colleague Arati Mishra wrote. 
With nearly $4 billion in cash, Infosys is also under pressure to make an acquisition and put its cash to use. 
"We cannot confirm rumours. We are dating but not yet engaged. We have expanded our addressable space, we are looking at products and platforms, country penetration and domain skills. Nothing to report yet," said Shibulal.