Bangalore: Infosys Technologies Ltd declared its results for the first quarter of 2010-11, showing a 2.4% decline in net profit from the year-ago quarter, prompting a sharp fall in the stock on a day when the Bombay Stock Exchange’s benchmark index rose marginally to end at its highest since February 2008.
However, the firm did raise its guidance for 2010-11, from that issued in April, indicating that it expects a sharper turnaround in business.
Mint offers a quick primer of what the results really mean.
Is growth back?
Yes. As companies in the US and Europe come under more pressure to manage costs even as they strive to grow, they are outsourcing more work to Indian firms. There is greater confidence that this year’s budgets, unlike last year’s, will be fully utilized.
“Interest in offshoring and outsourcing is going up,” says S. Gopalakrishnan, chief executive officer and managing director, Infosys.
Are IT stocks still good investments?
Graphic: Ahmed Raza Khan/Mint
The Indian IT sector is still a “growth story”, according to analysts, who add that large and midsize firms are well positioned to take advantage of this. The analysts say that while some stocks may look fully priced in the short term, there is plenty of headroom for growth in the medium to long term. On Tuesday, Infosys’ shares fell 3.44% to close at Rs2,795.30.
What do the company’s results mean for the IT sector?
It indicates that volume and revenue growth are back and that profit margins are under a bit of pressure. It also indicates that the challenge will be to retain talent and manage costs.
Are US clients outsourcing more work to India?
With the US emerging from the recession, American firms are offshoring more work to cut costs and remain competitive. For Infosys, revenue from the US has grown 2.6 percentage points to 67.3% in the past 12 months. Indian IT firms get about 65-70% of their revenue from the US market.
Is Europe an area of concern?
Yes, the continent lags the US in terms of a recovery. Technology researcher Forrester Research Inc. estimates that the European market for corporate IT products and services (measured in euros) plunged 6.3% in 2009. It expects the European IT market to grow slower this year at 4%, compared with 8% in the US.
Are billing rates going up?
No, they are stable, but as demand grows, some bigger vendors may ask, and get, higher rates.
Is productivity going up?
Indian firms are increasing employee utilization even as they focus on building a non-linear model between profitable growth and the number of people employed. For Infosys, revenue per employee grew to Rs5.39 crore in the first quarter from Rs4.80 crore a year ago.
Are Indian firms having to do more onsite work to combat the anti-outsourcing backlash?
Firms such as Infosys and Wipro Ltd are hiring more locals. This is being done not only to combat the outsourcing backlash, but also because good talent is more easily available now in the US and Europe. Infosys plans to increase its non-Indian workforce to 6% of its total workforce in the current fiscal, up from the present 5.3%.
Are Indian firms spending more on marketing to get more business?
Indian firms are hiring more sales people in the West to market their services. Infosys’ marketing expenses grew 30% in the first quarter.
Will operating margins continue to fall?
Rising labour and infrastructure costs in India and pressure on pricing are bringing down operating margins for Indian firms. In the first quarter, Infosys saw operating margins dip 1.8 percentage points on wage increases and currency volatility to 28.3%. However, brokerage firm CLSA, while commenting on Infosys’ fall in margins, said: “We have been waiting for Infosys margins to fall for half of this decade. After all, how many companies or businesses can sustain operating margins in the 30s through immense currency volatility, a major economic downturn and successive years of mid-teens wage hikes? As has usually been the case, margins have a downward bias in a wage hike quarter, and recover through the rest of the fiscal year as younger and cheaper resources join the firm. Given Infosys’ past ability at margin defence, we are not alarmed by the margin miss in Q1FY11.”