India’s second largest software services firm,­Infosys Technologies Ltd’s July-September results have demonstrated that the company’s robust business ­model can offset the double blow of an appreciating rupee and cost inflation to a large ­extent.

The rupee has appreciated by 13.2% on a year-on-year basis, impacting the company’s profitability by more than six percentage points. Wage inflation caused another three percentage points impact. But margins measured by earnings before interest and tax fell by less than one percentage point to 27.8% last quarter, from 28.6% in the year-ago quarter, as the company gained from better economies of scale, an increase in value-added services and billing rates increases.

Average billing rates have risen by 6.25% on a year-over-year basis. Only part of this has been on account of rate increases—new clients pay about 3-4% higher rates for similar services, but this wouldn’t have a large impact on company wide average rates since new business accounts for just 5% of total revenues. Contracts that come up for renegotiation manage to get rate increases of 2-3% on an average.

A large part of the increase in realizations is on account of the company’s focus on higher value services such as consulting, package implementation and solutions. Each of these businesses has grown much faster than the average company growth rate. The solutions business, for instance, has doubled in the past one year, points out chief financial officer V. Balakrishnan. This part of the company’s business leverages the intellectual property owned by either Infosys or its alliance partners. This segment enjoys margins that are four-six percentage points higher than the company average.

Finally, scale benefits also helped mitigate cost pressures and the impact of the rising rupee. Take, for instance, wage costs paid to software professionals and technical subcontractors. These costs have risen by 24% on a year-on-year basis in the September quarter, at a rate lower than the 31% increase in volumes (including BPOs). This is commendable considering Infosys gave its offshore employees a wage increase of 12-15% this year, and onsite employees a raise of 5-6%.

Not only have these salary increases been absorbed, but the company has ended up saving on a per employee basis. Balakrishnan says this is only because of the large scale of Infosys, which allows it to hire a larger proportion of novice employees compared with small-sized firms. Some 60 people from every 100 employee additions are freshers, which reduce the average wage cost of Infosys.

While Infosys has done well to mitigate the impact of cost inflation and currency appreciation, it’s not that the IT services story is hot all over again. In rupee terms, operating profit growth has tapered to just 15.5% on a year-on-year basis, a far cry from the 46.1% recorded in the previous financial year. Growth is expected to be in a similar range for the rest of the year as well. Net profit growth will be slightly higher as the interest earned on the company’s burgeoning cash reserves is adding nearly 3% to net margin.

Even so, the expected earnings per share growth of 18% for the year is hardly exciting for the markets, as is evident from the sharp correction in the Infosys share price. The company’s revised guidance clearly didn’t meet street expectations. But then one has to note that market expectations were unreasonably high. In the 10 trading sessions prior to the results announcement, Infosys shares had gained 20% (at a time when the Nifty rose 10%), on the assumption that results would be better than expected and the guidance would be raised by a large margin.

The September quarter results, as it turns out, were much better than most analysts’ expectations. Expectations on guidance revision were, as pointed out earlier, unreasonable. Revenue guidance hasn’t been raised by much because, according to Balakrishnan, the third and fourth quarters are generally “soft quarters".

What’s more important is that the company expects full year operating margin to be almost maintained (fall by 50-100 basis points) at last year’s levels. But while this is commendable, the markets had left little room for the stock to appreciate, thanks to the unjustifiably high jump prior to the results announcement. Even after the correction on Thursday, the stock trades at 27 times trailing earnings, which translates into a price-earnings/growth (PEG) ratio of 1.5 times. That makes the stock looks expensive, but analysts are likely to wait and watch the pattern of IT spending by overseas clients before taking a long-term call on the company and the industry at large.

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