Bangalore/Mumbai: India’s second largest software services firm by revenues, Infosys Technologies Ltd, exceeded analyst expectations when it reported profits expanded by more than 25% to Rs1,231 crore in the quarter ended December, aided by a tax reversal and interest earned from bank deposits.
Year-on-year revenue growth, at 16.9% in rupee terms, was the lowest in some 43 quarters, at Rs4,271 crore.
And, despite better billing on its services and lower selling expenses in the quarter, the weakening influence of the rupee, a currency that has expanded nearly 15% since the beginning of 2007, meant the slowest expansion of annual operating margins in the third quarter in seven years.
Exceeding expectations: Infosys chief executive Kris Gopalakrishnan at a press meet to announce the company’s results in Bangalore on Friday.
Operating margins, measured as a percentage of earnings before interest, taxes, depreciation and amortization, or Ebitda, as a percentage of sales, grew by 15.49% in rupee terms in the quarter, aided by a 13% decline in sales and marketing expenses. While the company earns more than 90% of its revenues in dollars, euros, pounds and the yen, most of its spending is in rupees.
Annual growth of Ebitda margins for the third quarter was 23% in fiscal 2002, and reached a peak of 49% in the December quarter of 2005.
Infosys, the first large Indian vendor to report quarterly numbers, said though the macro-economic environment was challenging in the US, from where it earns more than 60% of its revenues, the company had not seen customers decreasing or deferring their information technology budgets this year.
“I have not seen any slowdown,” said S. Goplakrishnan, chief executive officer of Infosys. “There is no project cancellation or delays.”
The company maintained its rupee profit forecast for fiscal 2008, despite an appreciating Indian currency versus the dollar, the currency that Infosys bills two of three clients in.
Infosys expects its revenues for quarter to March to be between Rs4,477 crore and Rs4,501 crore, translating into 4.8% to 5.4% quarter-on-quarter growth.
“While Infosys guided decent fourth quarter sequential revenue growth of 5%, the company disappointingly left the fiscal 2008 revenue and earnings per share guidance unchanged,” Manoj Singla, software analyst at JPMorgan’s Mumbai offices wrote in a note to customers.
“Weak volume growth is worrying, especially given concerns of a US slowdown, and would raise fears of sector slowdown,” the note said.
Investors, disappointed by the results, sold Infosys shares, driving them down 1.38% to Rs1,580.10 a share on the Bombay Stock Exchange even as the benchmark Sensex index rose 1.19%. The exchange’s information technology index, a basket of 18 technology stocks, did lose some 1%.
“We lost around Rs2,100 crore (due to rupee appreciation), that translates into around Rs1,000 crore on the bottom-line,” said V. Balakrishnan, chief financial officer of Infosys, explaining the slower growth in operating margins.
Still, the company maintained Ebitda margins, a key measure of profitability of operations in most businesses, in the quarter, improving it marginally to 32.59% from 31.27% from the preceding quarter. The 1.8% appreciation in the rupee impacted margins by 80 basis points, which was offset by increased billing rates, said Balakrishnan.
Other income, the revenue from sources other than operational income, was Rs152 crore in the quarter, almost flat from the year-ago period.
The software bellwether’s net profit rose 12% sequentially or over the July-September period, aided by tax reversal of Rs50 crore. The revenue in the period grew 4%, exceeding its 3.2-3.7% guidance, but below analysts expectations. The sequential profit growth, excluding the tax reversal, was 7.36%, close to the upper end of a Mint survey of six analysts that predicted it to be between 5.2% and 8% with the average at Rs1,176.9 crore. The poll had forecast revenues of Rs4,338.88 crore. The poll estimated Ebitda margins to be between 31.1% and 32.1%.
Nimesh Mistry of Man Financial India Ltd, a financial services firm, expressed disappointment at Infosys’ revenue growth. “We were expecting a quarter-on-quarter growth of 7% in the firm’s revenue,” he said, but added that his firm was thinking of upgrading the rating on the stock to buy from neutral because “chance for the stock price of Infosys to go down further from the current levels are low.”
Another analyst said Ebitda margin and growth was helped by lower selling expenses. “The margin expansion (in the quarter) was leveraged by lower selling, general and administrative expenses,” said Harit Shah, the Mumbai-based equity analyst at Angel Broking Ltd.
There remained some uncertainty among analysts. “There is nothing negative that has come out (yet),” said an equity analyst with a foreign brokerage, who preferred not to be named citing company policy. “We have to wait for next year’s outlook for a clearer picture.”
Infosys, which added 47 new clients, including four Fortune 500 firms, said the new customer wins came at an increased billing rate of 3-4%. “The pricing environment continues to be favourable with an upward bias and we are seeing negotiations with customers on our terms,” according to S.D. Shibulal, Infosys chief operating officer.
Infosys got more orders from its top client British Telecom Plc., which accounted for 9.5% of its total revenues in the quarter. The firm signed nine deals that ranged between $50 million and $100 million.
Infosys, which earned most of its revenue from application, development and maintenance of tech services, long considered low-end software activity, five years ago, now has services such as consulting, package implementation, total tech outsourcing, back office support and testing in its portfolio. These services, relatively new among Infosys’ offerings, are considered more profitable.
Infosys said improved supply of manpower, the major component for expenses in software companies, would ease pressure on salaries in the coming years. T.V. Mohandas Pai, director and head of human resources development for Infosys, said: “There will be wage moderation. We are doing ‘right skilling’, ensuring that those who are overqualified (such as engineers) are not put on jobs that could be done by a graduate.”
Infosys has increased offers to recruits from college campuses by 40% to 18,000 for the year to March 2009. The company added 8,100 people to take its employee base to 88,601 in the quarter just gone by. Infosys paid $26 million, or Rs102 crore, as settlement towards overtime wages to about 800 workers for three years, after it settled voluntarily with the California Division of Labour Standards Enforcement, the company added.
In the past year, the BSE’s benchmark sensitive index saw a 52.8% growth from 13,630 to 20,827.45, but the three largest IT stocks—Infosys, Tata Consultancy Services Ltd, or TCS, and Wipro Ltd—lost more than 20% each.
Just four of the 18 stocks in the BSE IT index gained on Friday. TCS, the largest Indian software services firm by revenues, gained 1.4% to close at Rs989.05.