Bangalore: Infosys Technologies Ltd, India’s second largest software company, cut its profit and sales estimates for 2007-08 (in rupees) after a stronger rupee eroded the value of earnings from the US, its largest market. Consequently, shares of Infosys fell 4.5% to close at Rs 1,929.7 and also dragged the exchange’s benchmark index, Sensex, down 0.7% to 14,910.6.
The company said net profit rose more than a third to Rs1,079 crore in the first quarter ending June over the year-ago period, boosted by increased business, a tax reversal and income from financial investments. But revenue for the quarter grew 25.1% to Rs 3,773 crore against a guidance of Rs3,896-3,913 crore.
The company, the bellwether of the software industry as well as the stock market, issued a guidance that sees its revenue at between Rs 16,238 crore and Rs16,433 crore for 2007-08, a growth of 16.9-18.3% over 2006-07, and earnings per share between Rs78.2 and Rs79, a growth of 13-14.1%.
Forecast vs Result (Graphic)
Infosys by the numbers (Graphic)
While declaring its results for the last quarter and the full year of 2006-07, the company had said that its revenue for 2007-08 would be between Rs17,038 crore and Rs17,308 crore, a growth of 22.6-24.6%, and earnings per share between Rs80.29 and Rs81.58, a growth of 20-22%.
The difference between these two sets of numbers reflects the impact of the rising local currency.
That’s also evident in the company’s dollar guidance for 2007-08, which has been revised upwards by 1% to between $4 billion and $4.05 billion, a 29-31% increase over 2006-07. “If the rupee had not appreciated, you would have seen a very good quarter even in rupee terms,” said S. Gopalakrishnan, who took over as chief executive officer of Infosys in the quarter.
Sequentially, Infosys’ profits for the June quarter declined 5.7% over those for the March quarter even as rupee revenues stayed flat.
Analysts had predicted Infosys to post a sharper slowdown in net profits, but higher other income of Rs253 crore for the June quarter (Rs128 crore a year ago) boosted the figure. Less this amount, and less the Rs51 crore in tax reversal, the company’s net profit margin, a measure of profitability, would have been 24%, its lowest in years.
Infosys said it was experiencing strong demand and being able to price its services higher, but added that it had little control over the impact of the rupee.
The rupee, currently at 40.38 to the dollar, climbed 6.8% against the US currency in the three months to 30 June.
Wage costs, too, eroded margins. Wages of tech and back office workers at the company in the quarter rose 30.2% year-on-year.
Some of the increase in wage costs was buffered by expanded revenues from its clients. Infosys raised prices for new orders by 3-4% and by 2-3% for contracts renewed in the quarter.
Those numbers won’t reflect in rupee growth: Infosys has forecast revenue growth of up to 15.7% for the second quarter to September as compared to the quarter ended September 2006. The growth in the corresponding period last year was 33.5%.
Infosys, which had hedges worth $925 million as of end-June to cover its dollar revenues from the risk of a depreciating US currency, will increase its currency contracts if needed later in the year, V. Balakrishnan, Infosys chief financial officer, said. He expected the rupee to trade in the Rs39-41 band to a dollar “in the short term”.
Business growth would, however, negate such concerns. “The hedge for everything is growth,” added Balakrishnan. Infosys paid an advance tax of Rs25 crore in June for 2007-08; it had paid exactly the same amount as advance tax in June 2006, for the year, 2006-07.
About 73% of Infosys’ revenues are designated in dollars.
Kalpesh Parekh, the head of institutional sales at investment house ASK Raymond James & Associates Ltd, said he was disappointed with the dollar revenue forecast, saying he had “expected the guidance to be at least 3-4% more”. He also said the company was showing “slower growth in traditionally major segments such as financial services”.
Edelweiss Capital Ltd’s senior vice-president Hitesh C. Zaveri said Indian tech vendors such as Infosys may have to “be satisfied with lower margins if the... rupee hovers around 40.5 against the US dollar”.
The profits of other tech vendors may also be hit by a stronger rupee. Tata Consultancy Services Ltd, Wipro Ltd and Satyam Computer Services Ltd may report a 25%, 21%, and 12% gain in profits according to a Bloomberg survey of analysts.
(Chitra Somayaji and Shailendra Bhatnagar of Bloomberg contributed to this story.)