What’s so special about Infosys Ltd’s results for its shares to rise by as much as 7%? The company has, in fact, cut its annual revenue target in dollar terms by 1%. And the only reason it has been able to increase its guidance in rupee terms is because of the sharp depreciation of the domestic currency, an already known factor. Why are then the markets cheering the results?

Most analysts are enthused about the fact that the company has cut its dollar revenue target by only 1%. Many of them were expecting a slightly higher cut owing to the twin impact of unfavourable cross-currency movement and increased uncertainty in the global economy. But Infosys said it’s keeping volume growth and pricing assumptions intact, and is adjusting the guidance target only to account for the changes in the cross-currency movements. It’s important to note here that Infosys has kept its volume growth and pricing assumptions for 2011-12 intact for the past six months, despite a considerable change in the macroeconomic environment globally.

The company’s annual guidance assumes quarter-on-quarter growth of 5.5% in the December and March quarters, which is an extremely healthy rate of growth for the current environment.

The Street also seems to have been positively surprised by the revised guidance in rupee terms. It was quite evident Infosys will raise its rupee guidance because of the sharp depreciation in the rupee. But the extent of the increase is considerably more than what analysts were expecting. Kotak Institutional Equities and Nomura had said in their results preview reports that they expect the firm to increase its rupee earnings per share (EPS) target to Rs136 and Rs135, respectively. Instead, Infosys said its EPS is expected to be in the range of Rs143-145. Sure, this is because of non-operating gains arising from the depreciation in the rupee. Still, a higher-than-expected EPS will influence the firm’s stock price.

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There’s nothing much to write home about on the September quarter results. Volumes grew 4.5% and margins increased only because of the rupee depreciation, and a drop in provisions for doubtful debts and post-sales client support. Excluding these gains, margins would have dropped. To a large extent, the rupee has come to the rescue of Infosys. And thankfully for the firm, it hadn’t hedged its foreign currency receivables as much as some of its competitors. As a result, it gets to keep most of the profit arising from the rupee depreciation. On the other hand, Tata Consultancy Services Ltd (TCS) and Wipro Ltd have much larger hedging positions and will, hence, see losses on these hedges offset a large part of the margin gains from the rupee depreciation.

Infosys’ better-off position on the forex front is reflected in the performance of its stock in the past month, during which it gained 22%, much more than the 10% gain recorded by TCS. Of course, that was after a prolonged period of underperformance.

Infosys continues to trade at a discount to its larger competitor—and this position is unlikely to change unless the markets see consistently good results for at least a few more quarters.

Graphic by Sandeep Bhatnagar/Mint

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