The Hindu Business Line : Infosys betters guidance, pricing outlook clouded

Amidst persisting concerns of lower IT spends by clients and the continuing US slowdown, Infosys has beaten its own guidance this June quarter. However, there is little clarity yet on whether the slowdown is impacting the pricing environment on deals.

Improving service-mix towards high-margin services, increased contribution from US clientele and high repeat business are positives.

But there are new concerns in the form of lower contribution to revenues from the telecom vertical, lower top-client revenues and lower pricing of select deals, which may reverse the stable outlook given at the beginning of the year.

Helped by a rupee that appreciated 7 per cent against the dollar over the quarter, the realisations have improved. On a sequential basis, the company has managed a 6.9 per cent growth in revenues to Rs 4,854 crore and 4.2 per cent growth in net profits to Rs 1,302 crore. This is despite 11-13 per cent increase in wages and a sequential increase of 15.2 per cent in selling and marketing expenses.

The contribution from the low-margin application development and maintenance services continues to be lower and has fallen over the previous quarter as well to 43.4 per cent of revenues. This has been on the back of high-margin services such as product engineering and infrastructure management increasing contribution and consulting and package implementation services maintaining contribution.

The manufacturing vertical (18.4 per cent of revenues) has increased contribution over the quarter, easing some pressure on the BFSI vertical, which by itself has seen a marginal increase in contribution to revenues.

Repeat business at 99.6 per cent indicates strong execution as well as client-mining capabilities.

The US has increased contribution to revenues over the previous quarter, which lends some credence to the theory of greater IT off-shoring during slowdowns.

This apart, headroom for enhancing several metrics such as utilisation for volume growth and offshore component of revenues for creating lower cost structure is available for the company.

Concerns exist

Infosys’ top client revenues (7.9 per cent) had seen a decrease from the previous quarter; raising concerns of lower IT budget spend. The pricing environment continues to be stable and the company has indicated that in some select large deals, clients may ask for lower pricing.

The telecom vertical has substantially lowered its contribution to revenues. This may be possibly explained by large BT deals going to Tech Mahindra, the recent $350-million deal being a case in the point.

Outlook

The company has indicated that continental Europe may start increasing contribution to revenues, although decisions from clientele there may be a tad slower.

Although budgets have been firmed up for the year, if there is a deeper and longer US slowdown, it may continue to be a matter of concern.

If the macro-environment remains stable and the business-mix tends to better margin services and the headroom to tweak operating metrics is exercised, the EPS guidance of Rs 100.5 for 2008-09 may be achievable. But the assumption here is that rupee will be at 43 levels, which is not a certainty.

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