Results may be good, but unclear client budgets for 2011 and a stronger rupee are potential dampers
Information technology (IT) giant Infosys posted a good set of numbers for the September quarter on Friday, with an across-the-board improvement. The sequential growth of 10.2 per cent in dollar-denominated revenues (rupee-based revenue grew 12.1 per cent) for the quarter was ahead of analysts’ expectations and aided by a robust 7.2 growth in volumes.
The company was also able to achieve an increase in blended rates, most of which came from onsite billing, wherein pricing improved 250 basis points (offshore rates were down 40 basis points). Similarly, better revenue mix also helped. Infosys is seeing incremental traction in the consulting and package implementation space and the new transformational deals are driving better realisations.
While top line growth was robust, operating performance was even better, aided by increased productivity. Excluding trainees, Infosys’ employee utilisation rate increased to 81.2 per cent in the quarter compared to 78.7 per cent in the June quarter. The utilisation rate has been consistently rising in the past few quarters — it stood at 70.9 per cent in the June 2009 quarter.
Employee attrition levels were up in the quarter on a trailing 12-month basis, but pressures seem to be easing for the company. It added 7,646 employees (net) in the quarter — the highest in over five quarters. However, the number of employees leaving the company fell to 6,618 from 7,833 in the June quarter.
Higher productivity, better pricing and favourable currency movement, put together, helped the company post earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 33.3 per cent, compared to 31.6 per cent in the June quarter.
With regard to the future outlook, though the management raised the dollar-revenue guidance for 2010-11 by 3.3-4 per cent (compared to the post-June quarter results guidance), a higher tax rate (a trend seen in June quarter as well), coupled with a stronger rupee, is likely to impact Ebitda by about 250 basis points for the full year. This is reflected in the new net profit guidance, which has been revised upwards by only 0.3-2.5 per cent.
In the medium term, since issues regarding weak economic growth of developed economies continue, there isn’t sufficient clarity over IT spends by clients in the calendar year 2011 which, along with the rupee’s movement, needs to be monitored.
Meanwhile, after touching its all-time high of Rs 3,249 on Friday, Infosys’ stock gave away the gains to close down 3.4 per cent at Rs 3,076.15 on the Bombay Stock Exchange, where it trades at 26 times its estimated 2010-11 earnings of Rs 122.5 (the management has given a guidance of Rs 115.07-Rs 117.07).
At these valuations, analysts believe an upside in the stock is limited.
