Infosys disappoints markets with below expectation Q1 net profit
Munira Dongre 13 July 2010

During the first quarter to end-June, the IT major was expected to clock net profit of over Rs15 billion. Infosys seems to have disappointed on three fronts -- European revenues, margins (due to wage hikes), and attrition (about 25%, which is too high)

Infosys disappointed the market with a net profit of Rs14.88 billion (disappointing, expectation was above Rs15 billion). Net sales was at Rs61.98 billion (more or less in line) while earnings per share (EPS) was at Rs26.05. Client additions were at 38, employee adds at 1,026 and FY11 revenue was seen at $5.72-$5.81billion thanks to 19%-22% growth (in line). FY11 EPS was seen at Rs112-Rs117 a share (on the lower side at the lower end).

The other highlights of the June quarter results were revenues from banking, financial services and insurance (BFSI), a key segment, were 36% of revenues vs. 35%. Revenues from Europe was down 5.3% quarter-on-quarter (qoq), 0.8% in constant currency (which was disappointing). Revenues from North America was up 6.8%, 6.9% in constant currency (in line). Utilisations including trainees increased by 370 basis point (bps) qoq (expected).

Infosys seems to have disappointed on three fronts -- European revenues, margins (due to wage hikes), and attrition (about 25%, which is too high). It is feared that to bring down attrition, wage bill may only rise from here. Also, since Infosys was expected to be the best result of the big three IT companies, prospects for the other two (Wipro & TCS) have dimmed.

The higher revenue guidance in US dollar terms to $5.72-$5.81 billion from $5.57-$5.67 billion suggests it expects volume growth to be strong - which is positive. EPS guidance was revised up by 5% to Rs112-Rs117 which seems to be mostly due to rupee depreciation expectations (Infosys is now assuming its US$/INR rate at Rs46.45 vs. Rs44.50 earlier).

Infosys management is focusing on the positives of the June quarter results. These were volume growth, which was 7.6% (best in many quarters, in fact since Q2FY08), higher employee additions at 36,000 for the year (vs. 30,000 earlier), and higher FY11 revenue guidance. They acknowledged that pricing has declined (1.6% in constant currency terms) and said they remain cautious because indicators seem weak but said they were "prepared for growth in the future".

The market was focused on whether Infosys exceeds Q1 guidance and by how much. The market clearly expected it to, and also expected an upward revision in revenue and EPS guidance for the year (consensus was in the range of Rs115- Rs119). Among all its verticals, BFSI was actually expected to be the best performer so any negative surprise there was supposed change sentiments. Although Infosys had the lowest exposure among large IT companies, the market was keenly watching to see the impact of European crisis, what's happening with clients such as BP, and of course volume, new client wins, and comments about IT budgets for the year. In an interview with CNBC during mid-June, S Gopalakrishnan, chief executive and managing director of Infosys had said that Europe remained a concern and believed that the recovery is going to be prolonged. But he had also said that Infosys had not been affected by the Europe crisis until then.

On Tuesday Infosys shares clsoed 3.4% down at Rs2,795 on the Bombay Stock Exchange, while the benchmark Sensex ended 0.3% up to 17,985 points.

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