The Hindu Business Line : Cost management, rupee help earnings

BL Research Bureau Infosys Technologies has come up with a reasonable earnings picture for the latest December quarter more due to internal cost management and fine-tuning of operating metrics, rather than any positive change in the business environment.

Infosys’ revenues for the quarter grew sequentially by 6.3 per cent to Rs 5,786 crore, while net profit grew at a strong 14.6 per cent and stood at Rs 1,641 crore.

While a depreciating rupee has also helped the company exceed its rupee guidance for the quarter, major cross currency movements against the dollar meant that the company was able to grow just one per cent sequentially in dollar terms.

Curtailed SG&A expenses, increased offshore component in revenues, higher utilisation levels and more fixed-price contracts have helped cost-optimisation and margin management for Infosys.

But a missed dollar guidance, lower annual guidance, decline in billing rates, minimal volume growth and a lower run-rate of revenues from some of its clients are worrisome indicators of a difficult macro-environment.

Margin management

Infosys has continued its focus on maintaining its profitability. The company’s selling and marketing expenses are down 9.6 per cent for the quarter. The offshore component of revenues, which makes for better margins but at lower billing levels, has been increased 150 basis points to 54.2 per cent.

While these two metrics have been used to optimise costs, an increase in fixed-price contracts (36.3 per cent of revenues from 34.5) means better realisations for Infosys. Utilisation has also been increased to shore up volumes. It helped that the rupee averaged 49.4 for the December quarter, ahead of the anticipated 46.97 to the dollar by Infosys while giving its guidance last quarter.

Environment difficult

The company has had a decline in billing rates of about 1.8 per cent. Given the likely moderation in IT budgets, clients may come back for further billing rate cuts. This may be offset by volume growth in normal circumstances; but that remains uncertain with overall volume growth only at 2 per cent for the quarter.

Given that Infosys has revised its full year dollar revenues downward to an effective growth of 11.8-12.8 per cent year on year, indicating that volumes may stutter in the months ahead. Its top-client’s revenues have been coming down over the past couple of quarters.

The company attributes it more to currency movement than to any scaling down of projects. Telecom and manufacturing verticals have also witnessed a slowing down in the December quarter.

With the aborted acquisition of Axon, the company has a healthy Rs 9,686 crore in deposit accounts and liquid mutual funds.

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