Result Analysis: Infosys Technologies

Result Analysis: Infosys Technologies

Infosys delivered marginally higher than expected 5.3% q-o-q dollar revenue growth in Q2 FY09. In constant currency terms (excluding the negative impact of US dollar appreciation against GBP, Euro and Aus$), the revenue growth stood at 7.1% q-o-q.

IT services (including consulting) revenues grew by 6.2% q-o-q in dollar terms. Volume growth recovered sharply to 6.5% q-o-q (onsite – 4.1% and offshore – 7.6%) and blended pricing was essentially flattish sequentially, impacted by the cross currency movements and 70 bps offshore shift.

In constant currency terms, pricing actually improved ~1.4% q-o-q. BPO revenues were flat q-o-q whereas product revenues de-grew 2.8% q-o-q. Overall, Infosys clocked a rupee revenue growth of 11.6% q-o-q benefiting from the average 6% depreciation of the rupee in Q2 FY09.

On expected lines, OPM improved by 260 bps q-o-q to 33.1% in Q2 FY09. The key margin tailwinds were rupee depreciation (~250 bps), lower visa charges, higher utilization and improvement in profitability of subsidiaries (especially Infosys BPO).

The SG&A% increased q-o-q from 12.8% to 13.5% as the company chose to invest some portion of the margins benefits. The utilization (including trainees) improved ~100bps q-o-q to 69.2%. Operating profit growth was robust at 21.3% in rupee terms.


Factoring a 3% impact of the dollar appreciation against other business currencies and another 3% impact of possible volume slippages from any further deterioration in operating environment, Infosys downgraded its FY09 revenue growth guidance in dollar terms to 13-15%.

Resultantly, the expected growth in earnings was downgraded to 10% y-o-y. The cut in the guidance was far higher than street’s expectations. To achieve the full year numbers, the company has to maintain revenue and profits at the Q2 FY09 level in the remaining two quarters.

In rupee terms, there was a marginal increase in the revenue growth (27.7%-30.2%) and EPS (Rs101.1) guidance for FY09 purely due to the rupee depreciation.

Infosys expects full-year OPM within 40-50bps of FY08 OPM of 31.4%. For Q3 FY09, company expects flat or marginal de-growth in revenues q-o-q and a modest increase in profits.


Before entering into the result season, we had downgraded Infosys’s FY10 EPS by ~6% to factor in a very difficult business environment i.e. lower volume growth and sharper pricing cuts.

Therefore, the new conservative FY09 guidance only marginally changes our FY10 EPS estimate to Rs104.9, which implies a ~5% growth y-o-y.

We reckon that a further downgrade in the annual guidance is unlikely given the minimal growth required.

Moreover, the company has still not witnessed any client specific issues (deferment in committed volumes, rampdowns, pricing cuts, etc). This should limit any further material downside in stock price and lend stability over the next 4-6 months.