Mumbai: Infosys Technologies Ltd’s March quarter results announcement had a double whammy in store for its investors.
First, the quarterly results were far lower than street expectations, with the company disappointing on both revenue growth and margins. Secondly, the company’s earnings per share guidance of between Rs126 and Rs128 in financial year 2011-12 is considerably lower than the street’s expectation that the company will guide for an EPS of around Rs138.
Most analysts were expecting the company to report a 4-5% sequential growth in dollar revenues in the March quarter and stable margins. Instead, the company reported a mere 1.1% sequential growth in revenues and a 125 basis drop in operating margin. Operating profit or earnings before interest and tax fell by 3.1% last quarter compared to the December quarter.
More importantly, with revenues growing by a mere 1.1% in the March quarter, the ‘exit rate’ turned out to be considerably weaker than most analysts had predicted.
In this backdrop, the fact that the company has guided for an 18-20% growth in dollar revenues in FY12 is a marginally positive surprise.
Analysts were factoring in an average sequential growth of 3-4% in revenues in FY12. But it turns out that Infosys has factored in an average sequential growth of between 4.3% and 5% in each quarter in FY12.
The problem, however, is that only a small portion of this is getting translated into higher profit. On one hand, the recent currency appreciation is expected to hit margins by about 11 basis points.
Besides, wage increases and an expected fall in employee utilization rates due to increased hiring are expected to hit margins by another 100-120 basis points. Add to this some other business investments, and the total impact on operating margin in FY12 is expected to be between 250 and 300 basis points.
This are slightly better on the net profit level, due to higher other income. Even so, the company’s earnings per share is expected to grow by only between 5.5% and 7.3% to Rs126-128.
Based on consensus estimates, the street was expecting Infosys to guide for an EPS of Rs138 and end FY12 with an EPS of close to Rs150.
Needless to say, there is a big disconnect between what the street thought Infosys would achieve and what the company thinks it can achieve. This explains the sharp correction of 7.5% in Infosys shares on Friday.