The Hindu Business Line : Infosys long-term growth story intact

The first quarter earnings card of Infosys Technologies looks disappointing. Infosys is known to give conservative guidance and even such guidance has not been achieved this time around.

But the numbers also show continuing business momentum; a positive pointer to the long term. Some of the higher-revenue earning services are showing an increasing contribution and steps taken by the management may help mitigate the revenue impact due to (any further) rupee appreciation.

The numbers: The rupee appreciation shaved off a whopping Rs 287 crore from revenues (Rs 3,773 crore) and contributed significantly to a flat growth in the top line on a sequential basis. Operating profit margin declined by about 3 per centage points compared to the preceding quarter. While rupee appreciation reduced realisations, the company kept a tighter rein on expenses. The net profit for the quarter (Rs 1,079 crore, adjusting for exceptional items) registered a 5.8 per cent decline on a sequential basis.

Guidance: Much of the variation between the company’s reported numbers and its earlier guidance came about due to the dollar being pegged at Rs 43.1. The company has now revised its dollar expectation to a more realistic Rs 40.58 and based on this it has given a revenue guidance in the range of Rs 3,952 crore-Rs 3,993 crore and Rs 16,238 crore-Rs 16,433 crore for the coming quarter and current financial year respectively. The EPS guidance is between Rs 77.31 and 78.11 for the current financial year, against the market expectation of Rs 81-82, without factoring in any increase in billing rates.

Moving up value chain

Though the company’s earnings report has received a lukewarm response in the stock markets, there are several positive trends from a long-term perspective. Some key trends that may keep Infosys’ long-term growth story intact:

First, some of the high-margin services like consulting and package-implementation (at 4.9 per cent and 18.4 per cent of revenues) have shown strong growth, indicating the possibility of higher revenue realisations. This trend also indicates that the company is making significant headway in moving up the value chain. The addition of multi-million dollar clients—32 were added in the quarter—continues to be robust.

Second, to mitigate currency risks, the company proposes to increase pricing by 3-5 per cent for new contracts, with a possible 1-2 per cent increase on existing contracts. About $925 million (about Rs 3,700 crore) worth of contracts have been hedged.

Third, on the human resources front, the attrition is flat at a reasonable 13.7 per cent and the utilisation levels have gone up by 90 basis points to 73.9 per cent, indicating a lowering of execution risks.

The company has also indicated on possible inorganic growth in Europe and the US and developments on that front will be closely watched.

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