The revenue growth projection for 2010-11 by Infosys Technologies Ltd has come as a pleasant surprise. The markets were expecting it to predict a 15% increase in revenue in dollar terms.
Infosys has said revenue will grow by 16-18% to between $5.57 billion (Rs24,842 crore) and $5.67 billion. That implies a quarterly average growth rate of 2.9-3.6%. What’s more, the firm ended the last fiscal on a strong note, with revenue rising 5.2% in dollars in the March quarter.
Infosys is known to keep a buffer while giving its guidance, so the internal growth target is likely to be around 18-20%. This isn’t very far from the Street’s consensus estimate of a growth of 21-22%. As a result, consensus estimates are likely to be raised by a couple of percentage points, especially keeping in mind that, unlike Infosys, analysts are hopeful of a pick-up in the second half of the year.
Besides, Infosys has guided for a 2.6-3.4% in the June quarter which, coming on the back of strong growth in the March and December quarters (5.2% and 6.7%, respectively), has only strengthened the markets’ belief that it is being conservative.
Graphic: Yogesh Kumar/Mint
However, the earnings per share prediction of Rs107-111 was below expectations. Adjusted for exceptional items, this translates into a growth of 0.1-4.3%. That’s hardly exciting for a company that trades at 26 times 2009-10 earnings.
The markets were assuming that Infosys will factor in half a percentage point decline in operating margin in its guidance. Instead, it has factored in a drop of 1.5 percentage points, primarily because of a sharp increase in wages. The firm has given a 14% average wage hike to offshore employees and a 2.5-3% hike to onsite employees. This will impact margins by 3 percentage points in 2010-11. While employee attrition has been a worry lately, analysts weren’t expecting such a high increase in average wages.
Chief financial officer V. Balakrishnan said: “The reason for the wage increase is that the business environment has turned around and the company wanted to retain its best talent. Given the expected growth, the company can afford the wage increase. Besides, some competitors are acting irrationally in the job market and the wage increase is with a strategic intent to keep them at bay.”
The lower-than-expected margins actually take away almost all of the gains from the hike in revenue estimates. Still, the Street is gung-ho about the company’s guidance, seen from the 3.5% rise in its stock price. There’s belief that it would be able to manage margins as the year progresses. At the beginning of 2009-10, Infosys had expected margins to fall by 3 percentage points, but ended up with a 0.9 percentage point increase, thanks mainly to higher-than-expected revenue growth. Analysts say this year could turn out to be the same. Besides, Infosys’ employee utilization is relatively low at 77%, excluding trainees, and this will serve as a lever to improve profitability.
Many of these optimistic expectations may come true. But even so, shares of Infosys trade at a rich valuation of 22 times 2010-11 earnings. Earnings growth between fiscal 2010 and 2013 is expected to be only around 18.5%, according to estimates by Kotak Institutional Equities. In short, growth expectations have been more than factored in in current valuations.
But the fact that there aren’t any decent alternatives in the Indian market for investors and that overseas inflows continue to be strong may continue to ensure that valuations remain rich.
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