Home / Companies / Infosys cuts revenue guidance on US woes

Bangalore: Infosys Technologies Ltd has cut revenue and profit guidance in dollars for the year ending March, because of slowing business in the US, its main market, and effectively withdrew from the battle for UK firm Axon Group Plc. by refusing to increase its bid for the company in response to a higher counter-bid from local rival HCL Technologies Ltd.

On Friday, Infosys reported better-than-expected numbers for the three months ended September, but some of its gains in rupee terms were based on the local currency’s 8.5% drop against the dollar, the currency in which the company bills most customers, in the three months. “The world has changed in the last few weeks. We are cautious," said S. Gopalakrishnan, chief executive officer and managing director of Infosys. “Demand continues to grow, but the ramp up is slower."

Infosys, like other Indian software services firms, earns most of its revenue in dollars and spends in rupees. While a stronger dollar helps the company’s cause, in this instance, it is accompanied by a slowdown in business in the US, a result of the credit crisis that began in that country, but has since spread to Europe, even Asia and India.

Infosys earned 33.4% of its revenue in the quarter from banks, finance companies and insurers, the worst hit by the slowdown. And 61.5% of its revenue in the quarter came from North America.

The firm’s second quarter profit grew by 30.2% to Rs1,452 crore compared with the same period last year in rupee terms. Revenue for the quarter grew 32% to Rs5,418 crore.

In sequential (quarter ended September over quarter ended June) terms, Infosys’ revenue was up 11.6% and net profit, 10%, again in rupees.

On the back of the falling rupee (the currency was trading at a historical low of Rs49.26 to the dollar on Friday), Infosys increased its revenue guidance in rupees for the year ending March to between Rs21,309 crore and Rs21,731 crore, a growth of 27.7-30.2% over 2007-08.

This is higher than the guidance given in July of a revenue between Rs21,278 crore and Rs21,622 crore, a growth of 27.5-29.5%.

The company also expects earnings per share to be Rs26.63, a growth of 23.6%.

In dollar terms, the company expects revenue to be between $4.72 billion (Rs22,986 crore) and $4.81 billion, a growth of 8.4-12.6%. In July it had estimated revenue to be between $4.97 billion and $5.05 billion, a growth of 19-21%.

Earnings in the year ended March will probably be $2.24 a share, missing the low end of the company’s July forecast of $2.32, Infosys said.

“The guidance, which factors currency movement and environment in the global economy, is below Street expectations," said Gaurav Dua, head of research at Sharekhan Ltd, a Mumbai brokerage.

Shares of Infosys fell 2.2% to Rs1,226.70 each on the Bombay Stock Exchange on a day when the exchange’s benchmark index fell 7.07% and the information technology sector index by 4.33%.

An analyst said it was no longer “about Infosys" because the real impact of the credit crisis on customers of software services companies cannot easily be ascertained. Revenue from banks, finance companies and insurers will go down, said Anil Advani, head of research at SBI Capital Markets Ltd in Mumbai. “It could be retail and manufacturing tomorrow; it is contagious."

Infosys expects customers in the US to move more work offshore to low-cost locations such as India, but the financial crisis that has felled Bear Stearns Companies Inc. and Lehman Brothers Holdings Inc., and led to the sale of Merrill Lynch and Co. to Bank of America Corp., could delay this move. “In the second quarter, we have seen a skew towards offshore," said V. Balakrishnan, CFO of Infosys. “(But) it is not yet a trend." Infosys grew revenue from banks, finance companies and insurers by around 3% in the quarter. Revenue from its Top 10 customers, including British Telecom Plc., Goldman Sachs and Citigroup Inc. did not grow, but Infosys added 40 new customers, including five with which it expects to do business of $50 million a year. “We are getting larger contracts and are being invited for bigger projects," said S.D. Shibulal, chief operating officer of the firm.

Infosys, which gets 99% of its business from existing customers, saw its business volume grow by 6%, at the same price. “We are not seeing (any) decline in price, it is flattish," Gopalakrishnan said.

Credit Suisse Group analysts wrote in a 7 October report that Infosys may scrap its plans to buy Axon after HCL offered 650 pence (Rs534.30) a share, or 8.3% more than Infosys’ bid.

“After careful consideration, the board of Infosys has concluded that it will not increase the price of its original offer," Infosys said. “The company is confident that its decision will have no material impact on its strategic plans."

Axon, which specializes in advising clients on how to run business management software, may be less appealing after SAP AG, the biggest maker of such software, said this month that it saw a “very sudden and unexpected drop" in business activity, the Credit Suisse analysts wrote.

After taking exits into account, Infosys added 5,927 employees in the quarter to take its total strength to 100,306. The firm said it was on course to hire the 25,000 people it had earlier said it would this year.

Bloomberg’sHarichandan Arakali contributed to this story.

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