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Business News/ Money / Personal-finance/  Infosys done in by high expectations
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Infosys done in by high expectations

Infosys done in by high expectations

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Infosys Technologies Ltd reported strong volume growth for the June quarter and its guidance suggests that growth would be strong for the whole year.

But average billing rates of its offshore unit fell sharply, which, coupled with its high wage increase in April, led to a more-than-expected decline in margins.

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Before the results, Infosys shares traded at almost 27 times trailing earnings, pricing in strong volume and earnings growth through FY12. With the company reporting a 2.4% decline in net profit on a year-on-year basis, these expectations will change, as seen by the fall in Infosys’ shares on Tuesday.

Volumes grew by 7.6% in the information technology services business last year, the highest in the last 10 quarters, and the firm’s dollar revenue guidance suggests that volumes could grow by as much as 25% in FY11. The sharp volume growth in the last quarter was offset partly by a 3.2% decline in offshore billing rates, even after adjusting for cross currency movements. The firm says this is due to price renegotiations that happened last year and that the pricing environment has actually stabilized. Some analysts, however, are perturbed about the quantum of decrease in billing rates. Infosys’ Ebit (earnings before interest and taxes) margins fell by 180 basis points last quarter. After making necessary adjustments for one-off items, the drop in margins is lower at 110 basis points.

But analysts are also worried that the company’s earnings per share target in dollar terms has been raised by just 0.8%, even though the revenue target has been raised by 2.5%. This is despite a 4% depreciation in the rupee since end-March.

Despite the negative impact of cross currency movements, some analysts feel that on a net basis, the impact on earnings should have been much lower.

With Infosys shares already priced to perfection, investors won’t be drawn to the stock unless there are earnings upgrades. The June quarter results, unfortunately, don’t provide that opportunity.

Graphic by Ahmed Raza Khan/Mint

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Published: 13 Jul 2010, 11:02 PM IST
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