Drops $ guidance for second successive quarter.
A depreciating rupee against the US dollar helped India’s second-largest IT services provider marginally shore up its revenue and profit for the third quarter ending December 31, 2008, and just about meet analyst expectations.
This performance was despite the global slowdown and uncertainty in the banking, financial services and insurance (BFSI) space.
The company registered a net profit after tax of Rs 1,641 crore (Indian GAAP) — a year-on-year growth of 33.3 per cent and sequential rise of 26 per cent.
Total income from software services and sales rose 35.5 per cent to Rs 5,786 crore from Rs 4,271 crore a year earlier. This was aided primarily by the addition of 30 clients by Infosys and its subsidiaries despite pricing pressure, though total clients fell to 583 from 586 in the quarter ending September. On a sequential basis, the company’s total income was up 19 per cent over the September quarter.
In dollar terms (US GAAP), Infosys’ third-quarter revenue rose 8 per cent to $1,171 million from $1,084 million a year earlier, but fell 3.7 per cent compared with $1,216 million in the quarter ended September 30.
More From This Section
Dollar guidance lowered: The IT bellwether, meanwhile, lowered its revenue forecast in dollar terms for fiscal 2009 to between $4.67 billion and $4.71 billion from its earlier guidance of between $4.72 billion and $4.81 billion in September last year.
This is the second successive time the Bangalore-based IT giant slashed its dollar earnings forecast this year. The global economic slowdown also dragged down sequential growth in dollar revenues for the first time.
Chief Executive Officer and Managing Director S Gopalakrishnan said the depreciation across the dollar-euro-pound currency basket had resulted in margin pressures. “The pound dropped 18 per cent in Q3, the Australian dollar fell 23 per cent and the euro slid 11 per cent against the US dollar. This resulted in some alteration of revenues from customers in the $80 million to $100 million bracket,” he said.
British Telecom alone contributes about 6 per cent of Infosys revenues currently. The rupee depreciation against the dollar also eased pressures on the Infosys’ hedge fund, which was pruned to $576 million from $932 million the previous quarter.
Infosys, however, marginally raised its revenue forecast in rupee terms for 2009 fiscal to between Rs 21,552 crore and Rs 21,757 crore at an annual growth of 29.1 to 30.3 per cent. Its EPS guidance was raised to Rs 102.92 at a year-on-year growth of 26.2 per cent.
Infosys has forecast its fourth quarter rupee revenues for 2009 fiscal to grow 21 to 25.5 per cent in the range of Rs 5,494 crore to Rs 5,699 crore. Income in dollar terms for the fourth quarter of fiscal 2009 is pegged to decline 1.2 to 2.5 per cent to $1,128 million to Rs 1,170 million.
Shares of the company on the Bombay Stock Exchange opened slightly weaker because of the lower dollar earnings forecast, but rebounded to Rs 1,230.20, higher 6.3 per cent from Tuesday’s close.
Weak growth: All business segments posted lower sequential growth this quarter. BFSI grew just 1.1 per cent; manufacturing declined 6 per cent; retail grew only 0.3 per cent and telecom fell 15.3 per cent.
The management explained that if one were to go by constant currency, the dip would not be that telling. For instance, the fall in telecom would then be just 3.4 per cent and the dip in manufacturing only 3.7 per cent.
Constant currency is defined as an exchange rate that eliminates the effects of exchange rate fluctuations and that is used when calculating financial performance numbers.
Companies with major foreign operations often use constant currencies when calculating their yearly performance measures. However, forex and treasury management consultant A V Rajwade said: “This is merely a way of presenting your financial data but in no way changes the reality that the currency fluctuations exist.”
| 31-Dec-07 | 31-Dec-08 | Growth (%) | |
| Total income | 4,271 | 5,786 | 35.5 |
| Gross profit | 1,946 | 2,711 | 39.3 |
| Op profit before tax & interest | 1,239 | 1,844 | 48.8 |
| Net profit | 1,231 | 1,641 | 33.3 |
| EPS (diluted) (Par value Rs 5) | 21.47 | 28.63 | 33.3 |
Pricing pressure too: The third quarter has fewer working days, so the markets had low expectations from the IT major anyway. But there was slight disappointment over pricing which was down 1.8 per cent. “The results were more or less on expected lines. Going ahead, pricing will be a concern. This could be because the visibility has not improved as expected,” explained Harit Shah, research analyst, Angel Broking.
“Pricing was no doubt impacted, but we believe that margins can be sustained into the fourth quarter. As the business cycle improves into the fourth quarter, we will emerge stronger,” Gopalakrishnan affirmed.
Another IT analyst, on condition of anonymity, said, “The blended pricing is down by 1.8 per cent on a quarter-on-quarter basis. Earlier the management tone on pricing would send signals that the environment would stabilise. Now it seems to be challenging. If pricing remains under pressure then we do see an impact on revenues in the next quarters.”
Admitting that pricing pressures had made the market more challenging, Chief Operating Officer S D Shibulal added that the company was comfortable with the pricing environment. “Pricing could be impacted if IT budgets are squeezed or the economic situation worsens,” he cautioned.
Other metrics: Revenue growth, believe Emkay analysts, remains challenging since clients continue to delay project starts as well as look to optimise budget spends with greater inclination towards offshore spend. Onsite volumes declined around 1 per cent QoQ (onsite revenues were down around 6.8 per cent) while offshore volume growth stood at 3.3 per cent QoQ (offshore revenues declined by around 1 per cent sequentially).
Selling, general and administration (SG&A) cost savings, however, reflected an impressive margin expansion of around 200 basis points (bps) QoQ which “positively surprised” analysts. The net addition of 2,772 employees remained in line with expectations with the company increasing gross hiring targets (by 2,000) for FY09.
The company, meanwhile, has set a new precedent in financial disclosures with reporting the break-up of cash balances in scheduled banks (around 67 per cent with PSU banks), which is not mandated by law as such.
Hiring: The company and its subsidiaries saw gross addition of 5,997 employees (net of 2,772 at total attrition rate of 11.3 per cent and involuntary attrition of 1.4 per cent) during the quarter. The company finished 2008 with just over 1, 03,000 employees on its rolls. Board member HR head T V Mohandas Pai said 3,500 more people are set to join Infosys’ rolls in the fourth quarter to March. “We have honoured all our job offers and will have recruited 27,000 by the end of this fiscal. This is well above our Q1 expectations of 25,000 people,” Pai said.