RESULT ANALYSIS: Infosys

The rupee depreciation turned out more beneficial than estimates and boosted reported margins, outlook.

Infosys reported a 10.8% quarter-on-quarter (q-o-q) rise in the September 2011 net profit to Rs 1,906 crore with forex volatility being the key factor that boosted overall financial performance.

While inter-currency movements marginally dampened the common currency (USD) reported revenues and topline outlook marginally, the depreciating rupee raised the tenor of its performance significantly after about four quarters of serial disappointments.

The company reported rupee revenue growth of over 8% q-o-q sequentially and nearly 17% y-o-y to Rs 8,099 crore. This was better than Street estimates and sent the stock zooming over 5% in early trades. The forex tailwind translated to a 209 basis point (bps) expansion in the operating margins to 28.16%.

RUPEE MOVEMENT

The rupee was 2.3% lower this quarter (on average) than the first quarter of FY12 and closed September-end at 48.97 to the US Dollar, about 9% lower than last year. As management guidance is based on this close level, the FY12 revenue guidance was increased by 5.5% over last quarter to between Rs 33,500 – Rs 34,100 crore, a 22-24% year-on-year (y-o-y) growth.

Revenue guidance in US dollar terms was cut by just 0.7% although currency volatility was expected to have a much sharper impact. Management emphasized that this was primarily due to currency and there were no material pricing or volume changes.

The currency position boosted operating margin outlook by 150 bps, and V Balakrishnan, the chief financial officer at Infosys said that the cumulative margin negative impact would be restricted to 50-100 bps y-o-y compared to the 250 bps contraction expected earlier.

The guidance for the coming quarter was also distinctly more upbeat to a 9-11% sequential q-o-q growth in rupee-based revenues to between Rs 33,501 crore – Rs 34,088 and 15-17.5% growth in EPS.

Common currency US dollar saw revenue growth pitched more modestly between 3-5% with bottomline EPS growth expected to notch 10-11%. The year would see growth evenly spread over the four quarters according to SD Shibulal, CEO and MD, Infosys.

OUTLOOK

Although Infosys saw strong growth across key segments and industries, the company continued with a cautious tone to its commentary on business outlook.

The US economic situation and sovereign issues in the Eurozone continue to make the global macro-environment uncertain, stated Shibulal. He assured that the company had seen no budget or project cuts from clients though they are refraining from taking long-term decisions due to the uncertain economic environment. This, management believed, could impact next year budgets.

The company will stay true to its pursuit of quality growth with profitability margins maintained within a tight range, said Balakrishnan, negating any suggestions of Infosys reverting to an aggressive pricing strategy. The company didn’t go into any specifics on its acquisition plans.

A softening rupee brings fair winds for the sector, improving competitiveness for Indian players. In a hardening economic environment every bit counts. How peers perform and commentary on IT budgets will be key factors to monitor going ahead.