After an excellent performance in the September quarter, Infosys Technologies Ltd has disappointed with its latest quarterly results.
Year-on-year revenue growth, at 16.9% in rupee terms, is the lowest ever in at least the last 43 quarters, or since such data is available on the company’s website. One could argue that the 11% appreciation in the rupee on a y-o-y basis would have depressed growth rates.
But, note that even volume growth of 24.64% is the lowest in that period, even lower than the nadir that was hit during the US recession in 2001-02.
The Infy website has published volume data only since FY03, but dollar-based revenue growth numbers are available, and the company’s conference call transcripts reveal pricing data. By dividing the revenues by the average price, it turns out that volume growth stood at 24.65% in the March quarter of FY02, when performance hit rock bottom. Considering that Indian IT companies haven’t “yet seen an impact on IT budgets and offshoring”, the drop in growth rates is worrying.
One can only imagine how low growth rates may fall if the company has to contend with a recession in the US and a cut in IT budgets. The only solace is that, unlike 2001-02, pricing is not declining. The chart alongside shows how growth rates have been declining since the 37% growth achieved in the December quarter of the previous fiscal.
Infosys’s chief financial officer, V. Balakrishnan, is quick to point out that FY07 growth numbers were helped by large orders from a few top clients. It wouldn’t be fair to compare those growth numbers with this fiscal’s, especially with a high base working against the company. Besides, the company management laboured hard to convince analysts during its conference call that it had won nine large orders during the December quarter and the troubled banking and financial services sector had grown at a rate higher than the company average. In short, there’s nothing to worry yet, according to Infy.
But, analysts aren’t convinced. The only reason Infy shares didn’t correct sharply post results was that it had fallen 11% from 10 days prior to the results and at current levels of Rs1,580 a share is just about 4% away from its yearly lows. Since the rupee started appreciating in March last year, it has underperformed the Nifty by 55%. After that sharp fall, a number of analysts are taking contrition calls, advising clients to buy the stock at current levels citing low valuations.
The December quarter results, however, provide hardly any reason for cheer.
Apart from the drop in volume growth, average realisations increased at a lower rate compared to the first two quarters of the fiscal and employee utilisation fell. Gross margins were nearly maintained (down just 10 basis points), and operating margin improved only because of sharp cuts in selling and marketing expenses. The company paid out performance incentives and commissions worth Rs57 crore in the September quarter and Rs27 crore in the year-ago December quarter, but just Rs3 crore last quarter.
Worse still, analysts were looking forward to hearing about clients’ IT budgets for 2008 and the impact on offshoring companies, but Infosys simply said that most of its clients hadn’t finalised budgets yet.
As a result, the uncertainty related to the US slowdown continues to be there in full measure. The company management tried to quell fears by pointing out to the large deals it won last quarter and the fact that it continues to enjoy higher prices when some contracts come up for renewal, but the 1.3% drop in Infy’s share price on Friday suggests that the markets weren’t comforted, especially since it came on the back of a 11% drop in the previous 10 trading sessions.
As pointed out in this column on Thursday, future direction of IT stocks would depend on statements and guidance estimates of global tech majors such as International Business Machines Corp. and Intel Corp., rather than results of domestic companies. In this regard, the markets are also looking forward to the results announcement of Cognizant Technologies, the fourth largest IT outsourcing company based out of India. The company follows a calendar year and would provide its annual guidance for 2008, which will set the pace for other large IT firms.
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