Infosys: Subdued guidance

The top line in rupee terms was flat sequentially and the operating profit margins remained depressed.

The 7 per cent appreciation of the rupee has taken its toll on Infosys' June quarter results, as expected, leaving the company's top line flat in rupee terms at Rs 3,773 crore sequentially and depressing the operating profit margin by 300 basis points q-o-q to 28.7 per cent.

However, in dollar terms, the rise in top line has been a decent 8 per cent, thanks to a 7 per cent rise in volumes and a 1 per cent increase in blended prices.

Moreover, the tech major has delivered what it had promised on the net margin front, thanks to higher other income, and has reported earnings per share of Rs 18 after excluding the tax write back.

The revenue growth guidance of Rs 16,238-16,433 for FY08 appears very muted at 16.8-18.3 per cent. But the dollar guidance, which has been upped from the earlier projected increase of 28-30 per cent to 29-31 per cent looks more encouraging and will make it a $4 billion firm by the end of the year. The earnings guidance of Rs 78.20-Rs 79 translates into an increase of 13-14 per cent, which is again very subdued.

With wage increases and visa costs, the rising rupee shaved off 700 basis points q-o-q from the operating profit margins. However, the improvements in utilisation, scale benefits and reduced losses from subsidiaries had a positive effect on the margins to the extent of 400 points.

The utilization for the quarter has been 75 per cent and the management believes there is room for improvement. The wage inflation-offshore salaries were up by 12-15 per cent, while onsite salaries were raised by 4-5 per cent and this would continue to pose problems. The attrition rates in the quarter remained high at 13.7 per cent.

While the environment remains robust and Infosys is able to mine its clients, with the number of $80 million clients having gone up to eight in the June quarter from four in the previous quarter, the firm is not able to enjoy any significant price increases because majority of the business is repeat business where the increases are not much.

The company can perhaps lower its costs by achieving revenue productivity, which was up one per cent in Q1 FY08. It is seemingly confident of winning orders as it has decided to hire 26,000 more people this year compared to what it had planned earlier. At the current price of Rs 1,931, the stock trades at just under 25 times FY08 earnings. While the rupee may appreciate further, most of the negatives appear to have been priced into the stock.

iGate Global Solutions: Difficult times

The impact of rupee appreciation has been as severe on iGate Global Solutions, a mid-sized technology player, as it was for Infosys. Besides a wage hike which reduced margins, the US sub-prime mortgage market also showed no signs of an improvement.

As a result, the company's operating revenues declined by 5.1 per cent in rupee terms, while its operating profits declined by a whopping 18.1 per cent q-o-q in Q1 FY08. Even the 2.3 per cent growth in dollar terms was disappointing. The operating profit margins declined by 210 basis points q-o-q to 13.2 per cent in the June 2007 quarter.

When the company announced the Q4 FY07 results, it had said that the operating margins would decline in Q1 FY08 on account of the US mortgage business.

The company management highlighted that rupee rise alone contributed pressure of about 120-130 basis points on the margins in Q1 FY08.

To offset this difficult operating environment, the company focused on keeping the costs under check and improving utilisation. The offshore utilisation improved by 400 basis points q-o-q.

The contribution of offshore to total revenues grew 320 basis points q-o-q to 50.7 per cent in the last quarter and offshore volume increased by 200 basis points to 77 per cent. The higher billing rates also aided iGate, as the offshore billing rates were up 2 per cent q-o-q and the onsite billing rates went up by 1.25 per cent.

The share of US mortgage business to the company's total revenues declined by 200 basis points q-o-q in the last quarter, thereby reducing top line growth. But iGate has succeeded in ramping up its European operations, which increased 20 per cent q-o-q. Nevertheless, the stock declined 3 per cent to Rs 288 on Wednesday.

Going forward, the management stressed that it was focusing on growth opportunities in Europe in the next few quarters and increasing its business from existing customers.

However, with the rupee showing no signs of weakening and a difficult operating environment in the key US market, an improvement in iGate's operating margins in the short term appears difficult.

The stock trades at 15 times estimated FY08 earnings and is likely to be an underperformer.

With contributions from Shobhana Subramanian and Amriteshwar Mathur