Infosys: Re-rating unlikely

As the rupee continues to appreciate, the tech major has not upped its top line guidance significantly.

Despite an increase in billing rates and a 257 basis points increase in the operating profit margin to 31.27 per cent q-o-q, Infosys' bottom line growth for the September quarter is up barely 2 per cent q-o-q to Rs 1,100 crore.

The quarter, a good season for technology companies, however saw the top line in line with expectations at 8.8 per cent q-o-q to Rs 4106 crore.

It indicates that it will not be easy for tech firms to negotiate better billing rates to counter the appreciating rupee. As the management points out, the greater value in products alone can fetch the firm better revenues.

Moreover, the US economy could impact order flows though there are few indications of that in the September quarter because volumes for key verticals such as BFSI and retail are up.

The BPO business has done well with a margin improvement of 3 per cent despite a hit of 100 basis points because of the Philips acquisition.

The concern for both BPO and the company as a whole lies in attrition, which was up marginally by 0.5 per cent in the quarter.

However, the management attributes it to people opting for higher studies and says wage inflation is under control. The reason why Infosys has hired fewer people - 4500 - is because its Mysore facility is behind schedule and it has had to postpone recruitments.

Even though the performance has more or less met expectations and horizontals such as consulting and package implementation are beginning to contribute more, the tech major hasn't really upped the guidance significantly.

Compared with $4.05 billion earlier, the top line guidance has seen a muted rise in the range of $4.16-4.17 billion. Meanwhile, the rupee could continue to appreciate. Infosys says it will end FY08 with an earnings per share of Rs 79.49-79.88 or an 18 per cent increase y-o-y.

On Thursday, the stock crashed 7 per cent to close at Rs 1976, and trades at just under 25 times FY08 estimated earnings and does not deserve to be re-rated at the current juncture. The stock has rallied about 22 per cent from its low three weeks ago to Thursday's high of Rs 2130, and could take a breather.

PFC: Immense business potential

Power-focused non-banking financial company, Power Finance Corporation (PFC), reported a satisfactory performance in its business.

Sanctions jumped more than 150 per cent y-o-y to Rs 21,900 crore in the second quarter of the current financial year though disbursements, which are spread over four to five years, grew 6 per cent to Rs 3,340 crore.

Loan assets grew 21 per cent. The net interest income grew 38 per cent to Rs 447 crore, thanks to improving yield on advances by 88 basis points and stable borrowing costs, which rose at a lower rate of 67 basis points.

Nearly two-thirds of its advances have a reset clause every three years, and the company has priced 48 per cent of its loans upwards during the current quarter. As a result, net interest margins improved 33 basis points to 3.76 - one of the highest when compared to its peers.

Even on the operational front, the company has delivered good performance as costs as a percentage of total assets came down to 0.06 per cent against 0.23 per cent a year ago. Its low NPAs fell even further from 0.23 per cent in second quarter of FY07 to 0.06 per cent in September 2007 quarter.

However, forex losses of Rs 22.9 crore resulted in operating profit increasing at 25 per cent and a 30 per cent higher tax provisioning led to a net profit growth of about 23 per cent.

This was lower than analysts' expectations and much below the net profit growth of 95 per cent in the June quarter. The business potential for PFC is immense as around 78,000 MW of new generation capacity is going to be added by FY12, and the company will play a pivotal role in financing.

At Rs 211, the PFC stock trades at about 1.9 times its estimated price to book value for FY09. While the stock has double since its listing in February 2007, all the near-term upsides are factored in.

With contributions from Shobhana Subramanian and Priya Kansara