Infosys, the bellwether for IT stocks, reports results amidst circumstances it has never faced before. The rupee has appreciated by 5.6% between end-March and end-June to 40.7 to the dollar. Infosys bases its guidance on quarter-end exchange rates and the dramatic change in exchange rates is bound to have a negative impact on its guidance estimates.
Analysts expect a 3-5% downgrade in Infosys’ earnings per share (EPS) estimate for 2007-08. And this also seems to be factored into its share price—it has fallen by 3% since it gave its previous guidance on 13 April.
Needless to say, Infosys and other IT stocks would take a hit if it decreases its earnings target by over 5% in rupee terms.
By the same logic, these stocks would rise if last quarter’s guidance is maintained. But that’s an unlikely outcome. Just to maintain its revenue guidance in rupee terms, Infy would have to raise its dollar-based revenue growth target to 37.5%, from the 30% target it set in April. Besides, each percentage point increase in the rupee hits margins by about 40 basis points. Last quarter’s 5.6% rise would, therefore, impact Infy’s margin estimates by over 200 basis points. It would be wishful to think that all of this would be offset by revenue productivity and cost savings. In its April guidance, Infosys had already factored in cost savings to offset the impact of wage increases (300 basis points) and rupee appreciation (150-160 basis points).
A 5% downgrade would bring Infosys’ target EPS to about Rs77; but consensus estimates are currently at about Rs83. And while Infosys usually beats its own estimates, this year is different. Unless the rupee depreciates from current levels, it’s unlikely that consensus estimates would be met.
In the June quarter, HDFC Bank’s net interest income was up 27.5% from the year ago period, substantially below the March quarter’s growth of 51% year-on-year. A sharp rise in the cost of funds took its toll on net interest margins, which fell to 4.2% from 4.5% in the March quarter.
The rise in deposit costs is also evident from the fact that interest expended as a percentage of interest earned went up to 50.9%, from 43.8% in the March quarter.
In the previous quarter, HDFC Bank had kept out of the bulk deposit market. This had boosted margins but hurt asset growth. In the June quarter, deposits have grown 34.6% (compared to 22.4% in the March quarter). Current and savings accounts, which were 55% of deposits in the March quarter, have fallen to 50% oftotal deposits. Naturally, net interest margins have been hit. Operating expenses too increased slightly from 28.6% of total income in the March quarter to 29.3%. But these negatives were outweighed by the huge rise in non-interest revenue, fees and commissions being the main contributor. Lower loss on sale and revaluation of investments also helped. But even that couldn’t help the year-on-year growth of operating profit decelerate from 47.5% in the March quarter to 41% in the June quarter.
Nevertheless, the bank was able to post a net profit growth of 34.2% compared to the year-ago period, bettering its record of delivering 30% growth every quarter, year after year, come rain or shine. (Net profit growth was 30.5% in the March quarter, mainly because it had to make one-time provisions.)
While operating profit growth may have been lower in the June quarter, investors are unlikely to lose any sleep on that account. They will be more interested in HDFC Bank’s massive Rs4,200 crore capital raising programme, of which the preferential allotment to HDFC has already been made. The money will enable the bank to ramp up lending and while equity will be diluted—analysts estimate a dilution of around 12%—the cost of funds will come down and net interest margins will improve.