Thursday, 20 November 2008

Inside Infosys Q2 numbers

India's bellwether Infosys Technologies beat expectations with a 30.2 per cent rise in quarterly profit, thanks to a weaker rupee. However, the signs of the global economic crisis are writ large on the company's Q2 results as it cut its full-year profit forecast.

This is probably the first time Infosys has scaled back its guidance both for revenues and profits. However, the company said that it expects no major project cancellations.

Here's piecing together Infosys Q2 numbers.

Number crunching
Profit rose to Rs 14.32 billion ($298 million) from Rs 11 billion in the quarter ended September 30, Bangalore-based Infosys said in a statement here. Revenues were up 32 per cent to Rs 54.18 billion from Rs 41.06 billion.

The company reported that the consolidated income is expected to be in the range of Rs 55-57 billion, projecting 29-34 per cent YoY growth under the Indian accounting system.

Weaker rupee helped
An 8.4 percent drop in the rupee against the US dollar in July-September was positive for Infosys helping it push its Q2 numbers.

"We benefited from the depreciation of the rupee against the US dollar during the quarter which was partially offset by the sharp appreciation of the US dollar against all other major currencies," Infosys chief financial officer V Balakrishnan said.

Indian software companies tend to get much of their income from the US billing in dollars. A weaker rupee helps companies to price their services more competitively and convert their dollar income into greater local currency. Average billing rates fell 0.3 per cent in the September quarter.

Cautious, but optimist
The company lowered its full-year revenue forecast in dollars citing global economic conditions. The revenue guidance is now down from $5.05 billion to $4.72--4.81 billion, about a five per cent fall.

However, though Infosys revised its full-year guidance, it said that it expects stable profit margins. Optimistic but cautious about medium-to long-term business growth, Infosys chief executive S Gopalakrishnan said, "The past four weeks have witnessed a lot of changes in the marketplace. We want to be cautious and that is why we have revised our guidance."

Gopalakrishnan added, "The challenging environment provides interesting opportunities for transformational service providers like us."

Newer geographies
The global financial turmoil has made India's IT companies explore new territories in Europe, Asia and the Middle East. This will help industry to lower its dependence on the United States, from where the IT majors draw more that 60 per cent of their revenue share.

Infosys too plans to expand its presence in Europe and elsewhere to cut its dependence on the US market. Recently IT-BPO industry body Nasscom said that it's time for IT firms to de-risk their marketing strategy from being US-centric and foray explore other geographies like EMEA (Europe, Middle East and Africa), APAC and Latin America.

Also, its the right time for IT majors to focus on other verticals such as manufacturing, retail, transport, utility and so on continue keep traction.

Employees addition
Bangalore-based Infosys earlier said that it plans to make selective acquisitions and recruit 25,000 people this year.

The company reported that a gross addition of 10,117 employees (net 5,927) for the quarter including its subsidiaries. The company has close to 1,00,306 employees as on September 30, 2008. Last quarter Infosys added 3,192 new employees.

According to TV Mohandas Pai, member of the board and head, HRD and education & Research, "Infosys continue to be an employer of choice. Our significant investment in training has enabled us to continuously enrich our human capital."

New clients
During the quarter Nasdaq-listed Infosys added 40 new clients, as compared to 49 clients it added during the previous quarter (Q1).

Pointing towards tough and challenging market conditions, company's COO SD Shibulal said that deal flow remained stable. Among major deals, Infosys bagged a pharmaceutical major and helped a global automotive supplier in end-to-end implementation and rollout of Oracle 11i.

A chemicals company selected Infosys as its preferred supplier to provide architecture services, application optimisation and performance improvement services around its Web Content Management applications. An auto major sought company's services in process engineering, as well as deployment and maintenance of applications.

Will not raise Axon bid
The company also abandoned its bid to acquire UK-based SAP sunsultancy Axon Group Plc. In August Infosys had announced its plan to buy British consultancy Axon Group Plc in an all-cash deal. The second-largest IT exporter in India agreed to pay $753 million in cash to acquire SAP consultant Axon.

In late September smaller rival HCL Technologies offered 650 pence per share on Axon, trumping Infosys' 600 pence a share offer in August.

In a statement, the company said, "After careful consideration, the Board of Infosys has concluded that it will not increase the price of its original offer. The company is confident that its decision will have no material impact on its strategic plans."

According to analysts, the worsening profit outlook prompted Infosys to walk away from plans to acquire Axon after its 407.1 million pound ($690 million) bid was trumped by HCL Technologies Ltd.

Cash rich
The board has declared an interim dividend of Rs 10 on shares of face value of Rs five. The company said that its liquidity position continues to be strong with cash and cash equivalents reaching $1.9 billion.

Analysts speak
The company's results have got a mixed response from analysts. Though most analysts term Infosys' second quarter numbers in line with expectations, they are disappointed with the revised guidance.

The company not raising Axon bid is also seen as negative by some analysts. Analysts also fear that other IT companies may follow Infosys and reduce guidance.

Rating cut
Goldman Sachs Group Inc this week cut its investment ratings on Tata Consultancy, Satyam Computer Services Ltd. and Wipro as its analysts turned 'cautious' on the Indian technology-services industry from “neutral,” citing reduced earnings expectations because the financial turmoil.

The International Monetary Fund said this week that the global economy is headed for a recession next year and that losses related to US debt may bloat to $1.4 trillion.