Rupee appreciation and wage costs to restrict the company’s profit growth in 2010-11.
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The quarterly results of Infosys Technologies were ahead of its own guidance, but more or less mirrored street expectations.
While revenue growth was better at 3.54 per cent sequentially (over December 2009 quarter) to Rs 5,944 crore, its largest market, US, which contributes around three-fifth of revenues, grew at a slower pace of 2.8 per cent. Contrarily, the Europe region that saw flat revenues in the December quarter grew 8 per cent. Even though Infosys management sounded cautious, as clients are not keen to take long-term spending decisions as yet, its dollar-denominated revenue growth guidance of 16-18 per cent for 2010-11 brought some cheer.
Among business verticals, banking and financial services maintained its momentum, while turnaround in the manufacturing space also chipped in better growth rates. Revenue growth in these two verticals ranged 7-9 per cent sequentially and helped offset the lacklustre performance of other verticals.
The rupee’s appreciation by 1.6 per cent in the quarter affected margins by about 70 basis points. This, along with increased hiring and salary hikes announced last year, dented profitability. Overall, operating margins slipped by about 100 basis points to around 34 per cent, while operating profits grew a mere 0.3 per cent in the fourth quarter. Higher other income, profit on sale of investments of Rs 48 crore and lower tax outgo helped net profits rise 2.6 per cent to Rs 1,600 crore during the quarter.
With an improvement in the business environment and the need to control attrition levels (that rose 180 basis points sequentially to 13.4 per cent), the company has raised employee salaries by an average 14 per cent from April 2010. It is also targeting to add 30,000 employees in 2010-11, about 11 per cent more than it did in 2009-10, to drive growth.
Going ahead, Infosys is factoring a 6 per cent rupee appreciation in 2010-11. In conjunction with wage inflation, this may pressurise margins in future. However, improvement in the employee-utilisation rates (excluding trainees) by about 150-200 basis points from the current 77.1 per cent and other cost-cutting measures should offset some of these pressures. Overall, the company expects a net erosion of about 150 basis points in margins during 2010-11, which along with a higher effective tax rate will restrict profit growth. For the full year, Infosys guided a muted growth in earnings per share to Rs 111. At Rs 2,782.35, up almost Rs 100 over Monday’s closing, the stock is trading at 25 times 2010-11 earnings and is not cheap.
With contributions from Sarath Chelluri & Sunaina Vasudev
