Bangalore: Infosys Technologies Ltd, India’s second largest software exporter, declared fourth quarter earnings that fell short of projections, sending the stock into a tailspin. The results were accompanied by the unexpected resignation of director T.V. Mohandas Pai after 17 years at the company.
His decision to quit was made public amid the announcement that Infosys will unveil board-level changes on 30 April.
Pai denied he was leaving because he had been denied a shot at the top post in the company, which has thus far only gone to the original founders of Infosys.
“This...announcement is not a sudden decision. I decided this one year ago and spoke to (chairman N.R.) Narayana Murthy nine months back,” Pai said in an interview. “He did ask me to stay and also if I wanted to be COO (chief operating officer) or CEO (chief executive officer), and I said no.”
Adding to the results disappointment was an earnings per share (EPS) forecast for the current fiscal that was significantly below market expectations—between Rs 126.05 and Rs 128.21 versus Rs 138. Infosys fell 9.6% on the Bombay Stock Exchange to Rs 2,988.80 at close, dragging the information technology (IT) index down 6.4% and the overall benchmark Sensex 1.6%.
Pai said he was leaving effective 11 June to allow younger executives an opportunity to occupy a senior post and to pursue his interests in higher education, besides spending more time with his family. Pai became one of the most high-profile representatives of Infosys as its chief financial officer (CFO) between 1994 and 2006 before becoming director, human resources.
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K. Dinesh, one of company’s co-founders, will also retire by 11 June, and former Microsoft India chairman Ravi Venkatesan has been appointed additional director.
“It is difficult to imagine Infosys without Mohan’s passion. We all know that he is taking this painful decision since he has much bigger projects in the horizon—nation building,” Murthy said in a statement.
Infosys posted a 9.7% rise in net profit for the year ended 31 March to Rs 6,823 crore and a 2.1% sequential rise in profit for the quarter to Rs 1,818 crore, lagging behind market expectations. March quarter revenue grew 2% to Rs 7,250 crore, marginally above its own guidance, but less than market estimates, which were in the 3-5% range. Revenue for the year rose 20.9% to Rs 27,501 crore.
“For a stock near its highs every day, results need to come at the top end of Street expectations, not struggle to meet them. By that yardstick, Infosys’ March quarter report is extremely poor, missing the most pessimistic expectations,” said Nimish Joshi of CLSA Asia-Pacific Markets.
However, CEO and managing director S. Gopalakrishnan defended the company’s performance: “When we give guidance, we do so on the basis of facts and data that we have,” he said.
The operating margin for the year ended 31 March in rupee terms was at 29%, down from 30.3% last fiscal, primarily due to an appreciation in the rupee. “The rupee appreciated 5% year-on-year, so our operating margin could have dropped down by 200 bps (basis points). It actually came down by only 100 bps. So, the performance has actually improved,” said CFO V. Balakrishnan. A basis point is one-hundredth of a percentage point.
“We are investing for growth. For example, in this quarter, we hired 8,500 people as against the plan of about 5,000 people. Utilization dropped to 75%, and so margins were impacted, but that is an investment for the future,” Gopalakrishnan said. Infosys had 130,820 employees as of 31 March.
The company’s guidance for fiscal 2012 (FY12), another much-watched number, was in line with expectations—revenue may increase 18-20% in dollar terms, and 15.4-17.3% in rupee terms. “The FY12 US dollar revenue growth guidance is encouraging. We believe that the guidance may prove conservative,” said Dipen Shah, senior vice-president of Kotak Securities Ltd.
The banking, financial service and insurance (BFSI) vertical, which brings in a little more than one-third of revenue for the company, saw a sequential decline of 0.3% this quarter. However, Ashok Vemuri, head (BFSI) at Infosys, said this was traditionally a soft quarter, and the low growth was coming after two quarters of very high growth. “This is because budgets are finalized this quarter. This isn’t a secular trend. We are not worried about it at all,” he said.
“We expect the demand environment to be normal this year for the industry,” said Gopalakrishnan. “We have created a structure with strong customer-driven vertical focus and have enhanced our investment to take advantage of the opportunities we see in the market.”
However, Balakrishnan cautioned that margin growth may slow down in the coming fiscal due to increased hiring and currency volatility. The EPS guidance for the June quarter is also expected to be lower at between Rs 27.59 and Rs 28.02, down from Rs 31.82 this quarter.
“We are increasing wages in India by 10-12% in the next fiscal, while wages outside India will be up 2-3%. So, wages will impact margins by close to 300 bps in the first quarter, but it will normalize over the year to a 100 bps drop. Currency appreciation will impact to another 100 bps on operating margin,” he said. Lower utilization from higher hiring (45,000 people in FY12 versus 43,000 in FY11) will add another 100 bps impact on the margins.
Graphic by Ahmed Raza Khan/Mint