Bangalore: India’s software industry may have to stop worrying about the recession and start worrying about the rupee if the results of Infosys Technologies Ltd for the last quarter of 2009-10 are any indication.
Infosys may have additional cause for concern, attrition: Though it hired 27,639 people in 2009-10, it effectively added only 8,946 people to its rolls, which means 18,643 people left the company in the course of the year. The company has sought to address this through handsome raises and promotions, moves that could force its rivals to follow suit.
Graphic: Yogesh Kumar / Mint
Infosys, which said its dollar revenue would rise by 16-18% this fiscal, said its revenue grew in the quarter ended March to Rs5,944 crore, 3.5% higher than that in the previous quarter and 5.5% higher than that in the corresponding quarter of 2008-09. Its net profit for the quarter was Rs1,600 crore, a 2.6% increase over the previous quarter and a 0.9% dip over the corresponding quarter of last year.
While the company expects increased business from the US and Europe, that were till recently in the grip of a recession, to contribute to growth, it anticipates a hit from the rising rupee. Infosys said its revenue in rupee terms would grow only 9-11% in 2010-11. The Indian currency has risen 6% against the dollar, the currency in which Infosys bills two in every three of its customers, in the past year.
Investors who were cautious in early trade after the results were announced, because of muted earnings per share projections—indicating a year-on-year decline of 2% or, at best, a growth of 2.1%—responded favourably to the stock later in the day. The stock closed 3.69% or Rs91.10 up at Rs2,782.35, lifting the IT Index by 3.09% on the Bombay Stock Exchange (BSE). The benchmark BSE Index closed 31.04 points lower at 17,821.96 on Tuesday. Stocks of most large software firms rose.
Infosys’ results may force analysts to rerate the software sector.
“…We consider the Infosys guidance of 16-18% dollar-revenue growth for FY11 as a game-changing inflection point for the industry. It is now clear that we need to think not about 20-25% growth, but rather close to 30%,” brokerage CLSA Asia-Pacific said in a note to clients after the results.
Infosys chief executive S. Gopalakrishnan said in an interview that while companies in Europe and the US had realized that they could “do only so much with cost cutting” and needed to invest. “When they make these investments, the model they want to adopt is the offshoring model (and) that is the reason why you are seeing Indian companies are showing faster growth,” he explained.
Gopalakrishnan’s confidence reflects the predictions of multinational research firms Forrester Research Inc. and Gartner Inc. that have forecast that the global IT market will grow by 7.7% and 5.3% respectively this year.
Interestingly, while the lower range of Infosys’ forecast reflects a lower earnings per share, the company has in the past, usually bettered its guidance, explaining the rally in the stock. “The business environment is better now. Even during the slowdown, they have shown higher growth. Infosys has the best execution engine in the industry, they have always outperformed their guidance,” said Anil Advani, head of research at SBICAP Securities Ltd, a Mumbai brokerage.
That seems to be the popular perception among analysts.
“Though the company factors in pressure on margins due to exchange rate and higher tax we expect EPS (earnings per share) to be upgraded as we go into FY11,” said Kunal Sangoi, research analyst at Edelweiss Securities Ltd in a note to clients.
With growth returning, Infosys now faces a familiar problem, attrition. In 2009-10, this touched 13.4%, a level last seen in early 2008. That number is well above the company’s comfort level, admitted Mohandas Pai, director, human resources at the company. “7-8% is normal (attrition), 9% is acceptable.”
Out of the 13.4% attrition rate, Pai said 3 percentage points is involuntary attrition, a reference to employees who were asked to leave.
Some of the attrition can be attributed to a new career plan put in place by Infosys which has caused significant resentment among some of its employees. In an effort to placate these and other employees, the company announced salary hikes of between 13% and 17% and has promoted 7,500 people. Infosys will take a hit on its margins by spending $134 million (Rs598 crore) on the raises, the second such in the past six months.
Infosys’ career architecture mapping programme, iRace, short for Infosys Role and Career Enhancement, was designed by human resource consulting firm, Mercer Consulting (India) Pvt. Ltd and rolled out in phases starting May 2008. The programme defines roles, competencies and proficiency requirements, requiring employees to have better depth in domain and experience. The new system meant 4,500 demotions in October and plenty of negative feedback from employees on the company’s internal blog.
Out of the 4,500 employees demoted in October post iRace, 2,500 have met the experience criteria and have been promoted in April (2010), said Nandita Gurjar, senior vice-president and head of global human resources. “Most of the remaining 2,000 will meet the (experience) criteria by October and will be promoted then.”
Infosys has forecast rupee revenue to be in the range of Rs24,796 crore and Rs25,239 crore for the year to March. It expects the dollar revenue to be between $5.57 billion and $5.67 billion. The firm ended 2009-10 with Rs22,742 crore in revenue and Rs6,219 crore in net profit.