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Infosys Q2 profit up 24.3%, provides weak outlook

Firm lowers revenue growth forecast for the year ending March to 17.3%, down from 19.7% projected earlier
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First Published: Fri, Oct 12 2012. 09 10 AM IST
Revenue for the September quarter was $1.79 billion, an annual increase of 2.9%, and marginally up from $1.75 billion it reported the June quarter earlier this year. Photo: Hemant Mishra/Mint
Revenue for the September quarter was $1.79 billion, an annual increase of 2.9%, and marginally up from $1.75 billion it reported the June quarter earlier this year. Photo: Hemant Mishra/Mint
Updated: Sat, Oct 13 2012. 12 19 AM IST
Bangalore: Infosys Ltd, India’s second largest software services provider, reported a lower-than-expected quarterly profit in the three months ended September, and provided a weak forecast for the outsourcing business citing economic uncertainties in its top markets—the US and Europe.
Helped by the rupee appreciation, net profit for the September quarter rose 24.3% to Rs.2,369 crore.
The company, however, lowered its growth forecast for the year ending March. Infosys now expects to grow its revenue at 17.3% to Rs.39,582 crore during the year, lower than the 19.7% growth it had projected earlier.
Infosys shares dropped as much as 8.8% on Friday, but recouped losses after the company clarified that the revenue growth forecast for the current fiscal year that ends in March 2013 does not include revenue from Lodestone Holding AG. The shares closed 5.36% lower at Rs.2,395.65 apiece on BSE on Friday.
Revenue for the September quarter in dollar terms—the currency in which Infosys bills most of its customers—was $1.79 billion, an annual increase of 2.9%, and marginally up from $1.75 billion it reported during the June quarter earlier this year.
“Global economic uncertainties continue to face the industry,” chief executive S.D. Shibulal said.
As a part of senior management changes, Infosys said its chief financial officer (CFO) V. Balakrishnan will be replaced by Rajiv Bansal from 31 October. Balakrishnan will continue to be a board member and lead the company’s back-office, India business and Finacle—the banking product.
The CFO change will be viewed negatively by investors since Balakrishnan was always highly rated in investment circles.
During the September quarter, revenue from the company’s India business unit declined 15.4% sequentially.
The company also announced a wage hike of 6% for its staff based in India and 2% hike for employees based in the US, Europe and other overseas locations.
Infosys, which counts Procter and Gamble Co. among its top clients, added 39 customers during the September quarter, lower than the 51 it had added during the June quarter.
Brokerage analysts tracking the company said Infosys disappointed on growth outlook as well as the management changes.
“(The results) were a huge negative. Not enough revenue growth, pricing was under pressure as expected, margins dipped despite an increase in utilization rates, there’s nothing positive,” said Karan Taurani of Mumbai-based IFCI Ltd.
Analysts were hoping that Infosys could raise its revenue growth forecast after it acquired consulting firm Lodestone last month.
“Investors were expecting guidance to be revised upwards by at least 2% because of the Lodestone acquisition. There’s still more pain for Infosys for at least two more quarters, if not more,” Taurani added.
Infosys, which had been criticized for not using its $4 billion-plus cash pile, announced a $350 million deal for consultancy Lodestone in September—its largest ever acquisition.
Brokerage analysts at JPMorgan had expected Infosys to grow its September quarter revenue by at least 3.2% to $1.8 billion. Instead, the company said its revenue for the quarter grew 2.9% to $1.79 billion.
Infosys said it expects revenue for the year ending 31 March to grow by 5% to $7.34 billion.
“Infosys is behaving like a trading stock exhibiting violent volatility on the day of results allowing tactical entry points to the investor post-results, but hardly achieving stock break-out,” JPMorgan India analysts Viju K. George and Amit Sharma said in their 9 October report.
Analysts tracking the sector said currency fluctuations, which favoured software exports until a few months ago, will now start playing a different role.
“Rupee depreciation has driven stable stock performance for the Indian IT (information technology) names despite material deterioration in annual revenue growth trajectory,” said brokerage firm Kotak Institutional Equities. “This benefit may not last for long as the rupee-depreciation kicker to earnings will likely start to wear off from the December 2012 quarter, with companies potentially reporting a deceleration in earnings growth to even a decline on annual comparison.”
Over the past few quarters, Infosys has been lagging its peers in growth. In August, Infosys cut its revenue growth forecast for the year ending March 2013 to 5% from its previous view of 8-10% after complaining of a drop in prices for the June quarter. Tata Consultancy Services Ltd (TCS) had posted a bigger-than-expected 38% jump in net profit for that quarter and said it expected to surpass Nasscom’s forecast of 11-14% increase in exports for the industry. Since then, Infosys shares have increased by 18%, outperforming the TCS stock. Like Infosys, Wipro Ltd also gave a lower-than-expected revenue forecast for its core IT services business.
Accenture Plc, on the other hand, is gaining market share and forecast strong annual earnings last month as its outsourcing business grows at a much faster pace than its core consulting unit.
India’s $100 billion outsourcing industry is led by TCS, Infosys and Wipro, in that order. The industry gets a majority of its revenue from the US and Europe, where companies are cutting back on IT spending amid the debt crisis in euro zone and weak economic growth in the US.
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First Published: Fri, Oct 12 2012. 09 10 AM IST
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