Infosys: Currency blues

Infosys' numbers are in line with guidance but below expectations

Despite lower expenses on sales and administration, forex losses dragged down Infosys' net profit for the December quarter to Rs 649 crore, a tad below market expectations, though in line with the company's guidance.

A Rs 5 crore loss in other income compared with a profit of Rs 44 crore in Q2FY06, pared net profit. Revenues grew in double digits at 10.4 per cent q-o-q to Rs 2,532 crore.

However, when adjusted for the depreciation of the rupee against the dollar (3.5 per cent during the quarter), the growth was lower at 6.9 per cent q-o-q.

Volume growth at 6.7 per cent has been somewhat disappointing, but it is a result of a higher base. Thus, there has been only a small benefit from higher prices, because 93 per cent of the revenues are derived from existing clients and not new clients, which are being billed at 3-4 per cent higher rates.

Again, operating margins are higher by 210 basis points q-o-q at 34 per cent but more than half the expansion has been owing rupee depreciation. Thus, the operational margin expansion has been modest at around 70 basis points.

The expenses on SG&A came off from 15.1 per cent of revenues in Q2FY06 to 13.6 per cent, thanks to a write-back of bad and doubtful debts, though the company did spend more on training. The management has indicated that this ratio would settle around 14 per cent, with more people being hired.

The good news is that prices are stable with an upward bias. Besides, the business is growing in geographies with Europe and its Australian operations breaking even.

Moreover, the company has managed to bag 36 new clients in the December quarter, taking the number of clients billing $1 million to an impressive 206 clients, up from 191 in the previous quarter.

The consulting business, which notched up revenues of $10 million, in the December quarter, should break even in the next couple of quarters. With its BPO subsidiary also growing, Infosys plans to add 3,500 people in Q4FY06, higher than the 3,226 added in the December quarter.

Infosys has given an EPS guidance of Rs 24.30-24.70 and a revenue guidance of Rs 2,590-2,599 crore for Q4FY06. For FY06, the company is targeting an EPS of Rs 89.90-90.30 and revenues of Rs 9,487-9,496 crore.

So, in Q4 the net profit needs to grow just 2.6-4 per cent for Infosys to be able to meet the guidance. That should not be difficult. Looking ahead, attrition is becoming a serious issue, which would lead to higher payouts on salaries.

Moreover, because the business now is much larger, the company will need to maintain larger benches, which again means lower utilisation.

However, the management says utilisation should be maintained in the region of 78-82 per cent. At the current price of Rs 2,975, the stock trades at 25 times estimated FY07 earnings and is reasonably valued given the predictability of its earnings.

The December quarter numbers may have been slightly disappointing. However, given that that it has a huge cash balance of Rs 4,400 crore, there could be upsides from inorganic growth, though in the past Infosys has not been as proactive as its peers in acquiring companies.