Strong results exceeded by expectations

Strong results exceeded by expectations

Infosys Technologies Ltd’s September quarter results are the strongest set of numbers it has reported in the past three years. The last time dollar revenues grew in double digits was in the September quarter of fiscal 2007-08, before the credit crisis hurt the company’s customers and hit demand for IT outsourcing services. Last quarter’s 10.2% growth in dollar revenues came on the back of strong 7.2% volume growth.

What’s more, earnings before interest and tax rose by nearly 20% as margins rebounded from June quarter levels. Some of this was due to favourable currency movements, while the rest was on account of improvements in employee revenue productivity and utilization rates. Many industry verticals and geographies grew at handsome rates, indicating across-the-board improvement. Business from Europe grew by over 15% in constant currency terms. Among service lines, consulting and package implementation led growth, demonstrating that discretionary spending by customers is returning strongly.

There’s little to nit-pick about the results. Why then did the company’s shares fall 3.3% despite the results? One view is that IT shares were hit because of the negative sentiment on the street in the past few trading sessions. But it’s important to note that IT shares were among the worst hit on Friday. The CNX IT index fell by 3.2%, even while the Nifty fell at a lower rate of 1.9%.

The blame lies with the markets, which had built in high expectations in the valuations of IT shares. The share prices of the top three IT firms have risen 17-22% since September, on expectation that these companies will deliver strong growth in the September quarter and continue growing at a fast pace into the next fiscal.

While Infosys’ results validate the belief that growth momentum in the near term is strong, it does little to support the view that strong growth will continue in the future.

The firm’s guidance for the December quarter is healthy, since it assumes incremental revenue of $66 million and sequential growth of 4.4%. But growth for the March quarter is assumed at just 1.4%. And because of the sharp appreciation of the rupee in recent times, the earnings per share guidance in rupee terms is practically unchanged from what the company had projected in July.

Explaining the subdued guidance, Infosys’ chief financial officer V. Balakrishnan says, “The macroeconomic situation in large economies remains uncertain and the volatility in currencies is huge.

In this environment, customers aren’t making commitments beyond 1-2 quarters and are cautious from a medium to long-term perspective." Valuations of IT shares, however, didn’t reflect any of this caution, and it’s not surprising why they corrected on Friday.