Re virus hits Infy Q1

Net up 35%; lower earnings outlook takes toll on markets.

The 7 per cent rupee appreciation against the US dollar during the first quarter ending June 30, 2007 took its toll on the revenues and margins of India's second largest software exporter, Infosys Technologies.

It forced the IT major to, in a long time, miss its otherwise conservative revenue guidance (Indian GAAP) by over 3 per cent.

The stock today lost more than 4.47 per cent. However, if the US GAAP guidance figures for the previous quarter are taken into consideration, Infosys beat the upper-level estimate of $908 million by 2.2 per cent.

This quarter, the company posted a net profit after tax of Rs 1,079 crore "" a growth of 34.9 per cent over last year's figure during the same period. Its earnings per share (EPS) increased to Rs 18.89 from Rs 14.36.

The net profit includes a reversal of tax provisions amounting to Rs 51 crore. The company posted a total (consolidated) income of Rs 3,773 crore, registering a growth of 25.1 per cent over last year's figure during the same period.

However, when compared to the previous quarter's figure, Infosys' revenues were flat and net profit growth dropped 5.7%. While the company's operating profit (EBIDTA) registered an annual (year-on-year) increase of 21.9 per cent, it dipped by 9.4 per cent on a quarterly basis.

The positive news, though, is that the company's selling, marketing, general and administrative (SG&A) expenses dropped 6.1 per cent as compared to the previous quarter's figure.

"As clients recognise the imperative of global sourcing in an increasingly-flat business world, the demand for large end-to-end players like Infosys continues to be strong," said Infosys CEO and Managing Director S Gopalakrishnan.

"For the first time in as many years, an appreciating rupee had a 3.5 per cent direct fallout on our operating margins. While a 13-15 per cent increase in offshore wages and 5-6 per cent hike in onsite salaries had an impact of 2.5 per cent, higher visa costs contributed another 1 per cent to the overall operational impact," Infosys CFO V Balakrishnan said.

He stated that Infosys was successful in neutralising the negative impact of a strong rupee by hedging against the US dollar (1.5 per cent), increasing the utilisation rate (3 per cent) and securing better pricing (1 per cent) to the extent of 4 per cent.

"As a result, the impact was brought down to 3 per cent on the operating margin. We had hedged $925 million to take forward cover at the conversion rate of Rs 40.58 per dollar. We will increase the forward cover if required by hedging more. The rupee had also appreciated against the euro by 4.9 per cent, pound by 5.5 per cent and other currencies during the quarter," Balakrishnan pointed out.

Meanwhile, under the Indian GAAP (consolidated), the company had its rupee guidance revised downwards which reflected the effects of an appreciating rupee.

During the quarter, Infosys incurred a capital expenditure of Rs 336 crore. It added 7,004 employees (gross) during the quarter. The net addition was 3,730. The attrition rate stood at 13.5 per cent. It intends to hire 26,000 employees in the year.

"Hiring continues to be strong and attrition is under control. Our investments in training and education are giving us enhanced capabilities," said T V Mohandas Pai, head of HRD and education & research, Infosys.

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Q1 ending june 30, 2007

Income was Rs 3,773 crore; YoY growth was 25.1%

Net profit after tax* was Rs 1,079 crore; YoY growth was 34.9%

* Includes Rs 51 crore reversal of tax provisions

Outlook under Indian GAAP - consolidated

Dollar guidance revised upwards; rupee guidance revised downwards

Q2 ending Sept 30, 2007**

Income: Rs 3,952 crore to Rs 3,993 crore;
YoY growth: 14.5 to 15.7 %

FY ending March 31, 2008**

Income: Rs 16,238 crore to Rs 16,433 crore;
YoY growth: 16.9 to 18.3%

Conversion 1 US$ = Rs. 40.58

** Including tax reversal of Rs 51 crore and Rs 24 crore in fiscal 2008 and 2007 respectively