As the demand environment was generally perceived to be significantly better than last year, post-US elections, and billing rates have been stable with an upward bias for the last couple of quarters, the market had factored in a much higher guidance.

The company has attributed the slowdown in volume growth to internal reorganisation by a handful of its clients and compliance issues relating to Anti-Money Laundering and Patriot Act by some financial services clients.

The contribution of BFSI (Banking, Financial Services and Insurance) in the fourth quarter fell to 33.8 per cent from 35.2 per cent in the previous quarter (with insurance dipping to 8.8 per cent from 9.5 per cent and banking/financial services to 25 per cent from 25.7 per cent). Infosys counts American Express, Bank of America, Goldman Sachs and Northwestern Mutual among its key BFSI clients.

While the combination of these three factors has induced weakness in the stock, this decline in price can be viewed as a good buying opportunity for investors with a one-year perspective. We remain bullish on the stock for the following reasons:

Unlike 2004-05, the company is banking on back-ended sequential revenue growth of about 7 per cent from the second quarter onwards to achieve its guidance.

Considering that Infosys traditionally starts its earnings guidance on a conservative note and revisits it by September, this year may be no exception. Even assuming that the rupee remains stable, which prompted Infosys to revise its guidance upwards in the first quarter of 2004-05 from 24-40 per cent, other industry-wide factors remain quite robust.

For instance, the IT spending patterns and the demand environment for offshoring, post US elections, is better than the previous year. In addition, opportunities from new service line such as infrastructure management, consulting (technology and quality) and package implementation are expected to remain buoyant.

Similarly, the upside from billing rates, which have remained stable the last couple of quarters, may give a leg-up to revenues in the latter part of the year.

Just as new clients are coming in at higher rates, old clients may also start showing an upward bias in pricing in the latter part of the year.

Apart from its client addition record, its client pipeline in the $5 million, $10 million, $20 million and $50 million and above category has remained quite strong.

Finally, employee addition numbers at 12,600 (9,600 for Infosys and 3,000 for Progeon) are also in line with overall revenue growth. A combination of these factors may lead to an upward revision in revenue and per share guidance to above 30 per cent in the second half of 2005-06.

On the flip side, however, if there is a sustained ramp-down or loss of business due to internal reorganisation in some of the key BFSI clients, the guidance will remain tepid.

From a medium-term perspective, Infosys, just like its other frontline peers, remains exposed to challenges such as competition from multinational vendors such as Accenture or IBM Global, expanding its board-level relationships among clients, ability to successfully widen its range of service lines and operate its workforce across multiple geographies.

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