Friday, July 10, 2009

Infosys net profit up, guidance down; faces pricing pressure

Technologies expects prices in the fiscal year to March 2010 to drop by 5% as its overseas clients battle slowing econ-omy,key officials said during its first-quarter results announce-ment on Friday. “Pricing environment continues to be challeng-ing. There are ongoing negotiations with clients,” the technology outsourcing major’s chief operating officer SD Shibulal said.

Infosys, India’s second biggest software exporter by revenues, beat street forecasts by posting a 17% jump in year-on-year net profit for the quarter to June, 2009 but economic challenges, pricing pressures and lower technology spend by major clients pushed the tech bellwether to lower its quarterly and annual revenue guidance.

While the broader market remained flat, Infosys’ scrip opened lower and then zipped up by nearly 4.8% -- trading at Rs 1,749 (previous close Rs 1,676 crore) nearly at close of Friday’s ses-sion.

Net profit for quarter ending June was Rs 1,527 crore, 17% higher than Rs 1,302 crore in the same period a year ago. How-ever, it was down 5.3% against March quarter levels of Rs 1,613 crore.

The expectations were, however, tempered by a revised earnings guidance for fiscal 2010, which the firm said would range be-tween Rs 21,416 crore and Rs 21,747 crore, reflecting a year-on-year decline of 1.3% to a growth of 3%.

It reported a 2.9% sequential fall in net income to Rs 5,472 crore for the quarter ended June 2009. While net sales for the March 31, 2009 quarter was Rs 5,635 crore, sales year-on-year was higher by 12.7% on Rs 4,854 crore posted in June 2008. Says In-fosys CEO Kris Gopalakrishnan: “We believe that in the short term, the global economic environment will continue to be chal-lenging.”

The firm, while adding 27 new clients this quarter, had 569 ac-tive customers this quarter, down from 579 in the previous quar-ter. To boot, revenue contribution from one of its marque cleints, slipped to 4.5% from 5.7% in the current quarter. Shibu-lal says Infosys had 19 $50-million plus clients for the June quar-ter. He pointed out that employee utilisation rate had come down to 70.9% against 74.5% in the March end quarter.

Operating profit margin improved by 50 basis points quarter-on-quarter to 34.1% in June 2009 against 33.6% in March 31, 2009. The IT major though expects FY10 operating margins to be around 31.5% and CFO V Balkrishnan sees operating margins coming down by 150 bps instead of the earlier 300 bps.

One of the reasons could be that the company’s employee strength declined by 945 during the last quarter to 1,03,905 with an attrition rate of 11.1% in the first quarter against 13.6% in the corresponding period of previous fiscal.

Agrees an analyst with Kotak Securities: “The improvement in margins came in due to the reduction in number of employees quarter-on-quarter. The sequential drop in number of employees came in after several quarters and was a surprise. The company has probably aligned costs to the expected revenue outlook.

Experts like James Friedman of Susquehanna International Group (SIG) said that while Infosys is gaining new business, fur-ther compensation increases and visa costs, though selective, could create incremental operating margin pressure. “Finally, the potential lower utilisation impact resulting from additional trainees hired could aggravate operating margin pressure,” he said earlier this week.

Earnings Per Share (EPS) increased to Rs 26.66 during the Q1, up 17.2% from Rs 22.75 in the same quarter of the previous year.

Revenue guidance for the September ending quarter was in the range of Rs 5318 crore-Rs 5413 crore, a year-on-year decline of between 1.9% to 0.1%. Explains Balakrishnan: “The global cur-rency market continues to be volatile and during the quarter, the rupee appreciated against the dollar. We continue to focus on margins while making the right investments to accelerate growth.”

In dollar terms, revenue guidance for the full year was between $4.45 billion and $4.52 billion, a decline ranging between -2.6% and -3.3%.

Meanwhile, financial brokerage firm Stifel Nicolaus downgraded Infosys stock to ‘sell’ from ‘hold’. “Lower guidance could be driven by slower ramp up of new work, higher tax rate, higher-than-expected pricing pressure (revenue), pressure from pricing, currency, and continued hiring, and increasing conservatism on Infy's part in giving guidance/outlook,” it pointed out

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