Infosys: Dollar blues

Topline grew 4% sequentially to Rs 4,271 cr in Q3; operating profit margins remain stable.

Infosys announced its third quarter results amidst much scepticism and as expected, failed to provoke any excitement on the bourses. However, the numbers were not damp either as its topline grew by 4 per cent sequentially to Rs 4,271 crore.

Volume growth at 4.5 per cent was lower compared to the Street's expectation of 6 per cent. The company added 47 new clients, of which seven contribute more than $50 million to the topline.

A positive surprise came in through the operating profit margins, which remained stable at 32.6 per cent, up 130 basis points sequentially and flat y-o-y, due to lower sales and marketing expenses, and scale benefits as well.

Net profit margins too expanded by 200 basis points q-o-q and its EPS grew 17.1 per cent to Rs 20.7 for the quarter, excluding the impact of reversal of tax provisions.

The management has guided for a 20 per cent revenue growth and 17 per cent earnings growth in FY08. The fourth quarter is likely to record a 5 per cent topline growth.

However, due to uncertainty on US IT-spending budgets, there is little visibility ahead. However, the Infosys management is sanguine about IT spends this year as well as an improvement in billing rates.

The company added 8,100 people during the quarter, up from 4,530 in Q2 FY08. With attrition 50 basis points lower q-o-q at 13.7 per cent, the increase in hiring hints at an expectation of higher volumes going forward.

Billing rates were higher by 3-4 per cent for new clients, and 2-3 per cent for renewals. The dollar is an uncertainty, though the company says a 3-5 per cent adverse movement can be handled.

At Rs 1,580, the stock trades at 19.5 times FY08 earnings guidance of Rs 81, and at 16.5 times estimated FY09 earnings, which is reasonable.