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Infosys result signals revival; market cheers Indian IT firms

Infosys result signals revival; market cheers Indian IT firms
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First Published: Tue, Jan 12 2010. 11 34 PM IST

Booster dose: Infosys Technologies CEO S. Gopalakrishnan.Harikrishna Katragadda/Mint
Booster dose: Infosys Technologies CEO S. Gopalakrishnan.Harikrishna Katragadda/Mint
Updated: Tue, Jan 12 2010. 11 34 PM IST
Mysore: Infosys Technologies Ltd’s results for the three months ended December signalled a strong revival in the Indian IT services business on the back of growth in the banking, financial services and insurance (BFSI) segment—the most important segment for Indian IT companies.
The company raised its forecast for this fiscal on the basis of an improving business environment.
Infosys’ net profit for the quarter declined 3.6% compared with the year-ago period, to Rs1,582 crore, and its sales declined 0.8% to Rs5,741 crore. Of this, Rs231 crore came from non-operational income—largely gains on mutual fund investments and interest on fixed deposits.
Booster dose: Infosys Technologies CEO S. Gopalakrishnan.Harikrishna Katragadda/Mint
The banking, financial services and insurance segment grew the fastest among various businesses for Infosys—by 10.1% over the three months ended September.
The results and the forecast enthused analysts.
“It feels like 2004 all over again as Infosys results point to a major up-cycle in outsourcing, driving earnings up to levels not imagined till recently,” said Bhavtosh Vajpayee and Nimish Joshi, analysts with CLSA Asia Pacific Markets in an investor note on Tuesday.
The stock market too cheered the company’s results.
Following Infosys’ announcement, the Bombay Stock Exchange’s IT index rose, and closed 4% up. The Infosys stock ended the day 3.97% up; stocks of its peers rose too—that of Tata Consultancy Services Ltd by 4.88%, Wipro Ltd by 4.89% and HCL Technologies Ltd by 3.68%.
Infosys’ results signal the contrast between 2009 and 2010. At the beginning of 2009, Indian IT services firms faced the prospect of a slowdown brought about by the September 2008 collapse of US investment bank Lehman Brothers Holdings Inc., and the ensuing financial and economic crisis.
The beginning of this year finds the banking, financial services and insurance industry investing in technology to support the integration of companies following a wave of mergers, some midwifed by governments, and spending more to meet new regulations, especially in the area of risk management.
“Because of the downturn, they actually had held back on these investments. Because they are confident in the economy, they are ready to spend,” said S. Gopalakrishnan, chief executive of Infosys in an interview.
He added that though IT budgets are likely to be flat in 2010, the volume of work moved by firms to low-cost countries such as India would increase as they sought to cut costs. In anticipation of the jump in business, Infosys, which has hired 18,000 people in the nine months to 31 December, will hire 6,000 more in the three months to 31 March. The company also said it would hire 15,000 engineers off campuses in 2010-11.
After a tough 2009, the global technology industry will see an 8.1% increase in spending this year with software and computer hardware leading the charge, according to a report from Forrester Research.
Banks, finance firms and insurers account for almost a third of Infosys’ business. And in the December quarter, 14 of the 32 customers it added were such companies.
Indian IT services firms are expected to derive almost one third of their overseas revenue of $48-50 billion (Rs2.18 trillion-Rs2.27 trillion) in the current fiscal from banks, insurers, and finance companies.
Most business segments are “back in green” said Shashi Bhusan, senior research analyst for the IT sector at Prabhudas Lilladher Pvt. Ltd, a Mumbai brokerage. Bhusan, who raised his price target for Infosys to Rs3,100 from Rs2,614, said that he “expect(s) the growth momentum to continue at an accelerated pace” as the “management remains optimistic about improved demand environment”.
Not all analysts, however, agree. CLSA’s Vajpayee and Joshi, who too have set a price target of Rs3,100 for Infosys, do and argue that “street estimates are too low, scepticism on valuations too high in context of earnings upgrades that will happen and lie ahead.” But Ankur Rudra, the IT analyst with UK-headquartered investment advisory Noble Group Ltd said that current valuations of large-cap IT stocks are “relatively rich” and that “a fair amount of upsides and positive news flow has already been priced in.”
“Previous quarter, the business from BFSI was driven by mergers and acquisitions we saw in that space in the US and this quarter management commentary indicate that a significant portion of it related to risk management and compliance,” said Rudra. “Such business may not really be of a recurring nature that can last several quarters.”
Lison Joseph in Mumbai and Reuters contributed to this story.
the sector index and outperforming a 2% rise in the broader market.
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First Published: Tue, Jan 12 2010. 11 34 PM IST