Infosys Technologies Ltd has beaten the upper end of its dollar revenue guidance target by 5.8%, the highest level of outperformance in the past 23 quarters. The last time it beat the upper end of its dollar revenue target by a higher margin was back in the heyday of mid-2004.
While there’s little doubt that Infosys has done exceedingly well on revenue growth, it must also be noted that the company has been ultra cautious with its guidance lately, after missing its guidance in the preceding fiscal year. The high level of outperformance should be also seen in that context.
This is not to take away entirely from the company’s good performance. Growth was led by an increase in volumes, up 6.1% compared with the preceding quarter, which is a very healthy sign. What’s more, pressure on billing rates has abated.
Average price realizations improved by 0.2% in constant currency terms, compared with a 1.1% drop in the September quarter. Besides, while the financial services sector led in terms of growth, up 9.4% quarter-on-quarter in constant currency terms, most other sectors also did well. Only the retail industry, which has been plagued because of a drop in consumer spending, saw a drop in revenues in constant currency terms.
Graphics: Yogesh Kumar / Mint
The European region has been lagging in the recovery and this is reflected in revenues being flat last quarter. But North America and the rest of the world grew at an impressive rate by over 7.7% in constant currency terms.
The company’s reported operating margin of 35.5% seems extremely impressive, since they are 90 basis points (bps) higher compared with the September quarter, despite an impact of 180 basis points due to the appreciation in the rupee. One basis point is one-hundredth of a percentage point.
According to the company, this impact was offset by an improvement in employee utilization and price realization. But what also needs to be noted is that Infosys benefited last quarter from a reversal of provisions for doubtful debts as well as provisions for post-sales client support and warranties. If these provisions had been at Q2 levels, margins would have fallen by about 80 bps quarter-on-quarter. This is still better compared with street expectations of a 120-150 bps drop in margins due to rupee appreciation and salary hikes.
The company’s commentary about the environment for information technology spending has also improved. According to chief financial officer V. Balakrishnan, the confidence level of clients has gone up in the past three months, with even discretionary spend increasing. However, since budgets for this calendar year are expected to be finalized by mid-February, revenues are likely to be soft this quarter.
The company expects revenues to grow by about 1% again, but as pointed out earlier, this should be seen as part of its cautious stance. Infosys has increased its target for gross hiring from 20,000 employees to 24,000 employees, reflecting a sanguine view of demand.
Given this rosy backdrop, analysts are likely to raise earnings estimates by 4-5%. But much of the optimism seems to be already reflected in the current share price, which discounts FY10 earnings by around 24 times.