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Infosys Q3 earnings disappoint, sends stocks tumbling

Infosys Q3 earnings disappoint, sends stocks tumbling
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First Published: Fri, Jan 14 2011. 10 46 AM IST

Updated: Fri, Jan 14 2011. 10 46 AM IST
Bangalore: A tepid 2.3% quarterly increase in revenue and a 2.5% increase in net profit (both in rupee terms) for Infosys Technologies Ltd failed to enthuse the markets, sending the stock tumbling and dragging the Bombay Stock Exchange’s (BSE) Sensex down 1.8% to close at 19,182.82 points.
Infosys is perceived to be a weather vane for the fortunes of India’s $60 billion (Rs2.7 trillion) information technology (IT) outsourcing industry. India’s second largest IT exporter ended 4.82% down at Rs3,212.30 on BSE.
The firm reported quarterly revenue of Rs7,106 crore and net profit of Rs1,780 crore. However, the continued slow pace in the recovery of the key US and European markets—from where it gets the bulk of its revenue—led the firm to give a cautious outlook. Infosys counts Goldman Sachs, BP Plc, BT Group Plc, ABN Amro and Deutsche Bank AG among its clients.
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While quarter-on-quarter (q-o-q) operating margins came in flat at 30.2%, volume growth was 3.1%. The results disappointed analysts as consensus numbers had estimated profit at Rs1,815-1,830 crore and revenue at around Rs7,200 crore.
Dipen Shah, senior vice-president at Kotak Securities, said the results were “marginally lower than our expectations. The management commentary reflects caution on the back of macroeconomic concerns. Thus, the Q4 and FY11 guidance are also below market expectations”. He added, however, that the “fundamentals remain strong”.
Rajiv Mehta, assistant vice-president (research) at IIFL India Private Clients, said the results came in behind expectations with the muted q-o-q volume growth of 3% being the key disappointment.
The constant dollar revenue growth at 4.7% q-o-q was aided by sequential improvement in offshore pricing. Margins were maintained (in line with expectations) despite significant rupee appreciation and utilization decline supported by improved pricing and favourable cross-currency movements.
Employee addition remained strong and attrition appears to have stabilized, going by the figures. However, the conservative management commentary and flattish Q4 FY11 growth guidance was not encouraging.
Infosys chief executive officer (CEO) S. Gopalakrishnan said, “It was overall a good performance, and next year looks to be a normal year for IT.”
He expects the industry to grow in the 18-20% range for the year, with Infosys performing better than this. While Infosys was positive on the US market, it was still cautious about Europe, Gopalakrishnan said.
The CEO expressed concern on the macroeconomic front and the risk of sovereign default.
He cited seasonality, with Q3 being typically slower, as having an impact on the performance. “Sometimes we see a kick from budget flush, which was not (there) this quarter either,” he said, referring to the technology spending plans of firms.
While repeat business was at 97.5%, Infosys saw growth across the client hierarchy in terms of business value, the CEO said.
Breaking down the numbers further, the retail sector grew at 6.6%; banking, financial services and insurance grew at 8.3%; and manufacturing at 9.8%.
While the first half of the year saw several large deals being closed in the $100 million-plus range, big deal sizes in this quarter were around the $50 million range, Gopalakrishnan said. “This is not a trend,” he said. “But we saw smaller deal sizes and shorter-term contracts.” Million-dollar clients increased to 350 from 337, while eight new clients with revenue in the $50-70 mn range were added.
Chief operating officer S.D. Shibulal said that 40 new clients were added during the quarter, with most of them in the “must-win marquee category with high potential. We were focused on adding quality clients”.
Growth in products and platforms such as I-transform and Shopping 360 crossed 5%, and new models of engagement, in contrast with traditional time and materials billing, also saw good growth at 8-9%, he said. “These models truly convert their fixed and variable costs and normalize clients’ spending, we see a good response,” he said.
In addition, there was a good pipeline of large deals, defined as ones upward of $50 million, and these will be closed in the coming months, he said.
Chief financial officer V. Balakrishnan said there was a slight increase in pricing by 1.6%. “We were thus able to hold on to margins at 30.2 %, in spite of cross-currency volatility being high, with extreme swings.”
Abhishek Shindadkar of ICICI Securities Ltd said that the pricing uptake of 1.6% could be largely attributed to the depreciation of the dollar against the pound, the Australian dollar and the euro. That’s why the pricing increase in constant currency terms was only 0.5%. He said the low volume growth of 3.1% was mostly due to the seasonality.
He said the market’s disappointment on earnings growth was because expectations were too high. “For FY11 earnings, the consensus estimates are very wide ranging—almost 15% between the lowest and highest. The disclaimer on macroeconomic concerns expressed by Infosys could well be to temper market expectations,” he said.
Both Shindadkar and Nitin Padmanabhan, an Indiabulls analyst, said the usual budget flush in Q3 was missing due to macroeconomic uncertainty. “The only concerns for Infosys are macroeconomic,” said Padmanabhan. “Otherwise, it seems next year will be reasonable, clients will continue to spend.”
Infosys, which had 127,779 employees as of 31 December, said while attrition was marginally higher on a 12-month basis at 17.5%, it was coming down in absolute terms. Human resources director T.V. Mohandas Pai said Infosys was looking to make 26,000 campus offers this year, and 18,000 had already been made. “The target of 26,000 campus offers this year is a positive, up from 20,000 last year,” Shindadkar said.
For the fiscal ending March, Infosys expects revenue to be at Rs27,408-27,481 crore, a y-o-y growth of 20.5-20.8%, as against the earlier 18.5-19.4% guidance. In dollar terms, it expects revenue to cross $6 billion, with earnings per share at Rs118.68-118.90 against the earlier guidance of Rs115-117.
Graphic by Paras Jain/Mint
Priyanka Pulla in Bangalore and Surabhi Agarwal in New Delhi contributed to this story.
sridhar.c@livemint.com
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First Published: Fri, Jan 14 2011. 10 46 AM IST