Infosys: Major guidance

Infosys exudes confidence despite a rising Re and the outsourcing backlash

Last year, the Iraq war and the SARS problem had caused the Infosys management to give a cautious guidance of 13 per cent earnings growth. It ended the year with 30 per cent growth.

This time around, it has, in a manner of speaking, thrown caution out of the window "" it has announced a very aggressive 3-for-1 bonus, a Rs 100 special dividend and more importantly, according to its guidance for FY05, revenues will grow over 30 per cent in dollar terms.

This, despite the fact that the backlash against outsourcing in the US is expected to continue at least till the US elections are over. In the March quarter, revenues from the US geography fell 3.9 per cent sequentially, which is significant as it still accounts for over 65 per cent of revenues.

The company, however, doesn't think this is the beginning of a trend and in any case other geographies made up well last quarter. Coming back to the guidance, the company has assumed an exchange rate of Rs 43.4 per dollar, which was the closing rate on March 31, 2004.

This is 5.2 per cent lower than the average translation rate for FY04. As a result, revenue growth in rupee terms is much lower at 24 per cent. And earnings growth is pegged even lower at 20 per cent.

This, however, is not because of the rupee. The four percentage point difference between revenue and earnings growth is primarily because of investments the company plans to make in its new business such as consulting.

The impact of the rupee on profitability will, to a large extent, be negated by hedging, but as the company found out in the March quarter that may not be sufficient.

Last quarter, the sharp appreciation in the rupee led to a negative impact of Rs 26.83 crore on the company's bottomline, compared to a positive impact of Rs 19.52 crore in the December quarter. One of the reasons for this is that regulatory constraints force the company to hedge only to the extent of around 25 per cent of its revenues.

In any case, Infosys plans to make good any loss owing to an appreciating rupee by cutting SG&A (selling, general and administration) expenses by 220 basis points.

Infy has also effected a 17 per cent hike in the fixed component of offshore salaries, but this will not impact margins because a similar amount was paid as a one-time bonus in FY04. The impact on the net margin is expected to be 50-100 basis points.

Thanks to the sharp jump in the stock price on Tuesday, Infy now trades at around 25 times estimated FY05 earnings. Going by history, this is hardly much, especially given the confident outlook of the management and the fact the its subsidiaries look well set to bear fruit in the medium-term.

Hero Honda zooms ahead

Hero Honda's good performance continued in the March quarter, with sales growing by an impressive 38.2 per cent. This was on the back of a 50 per cent jump in volumes, primarily led by a surge in the sales of CD Dawn, the company's offering in the entry-level segment. This also explains the difference in the volume and revenue growth rates.

Importantly, despite the shift in the product mix, the company has maintained its operating margin at around 17 per cent. This is significant because raw material costs have been on the rise.

Fortunately for the company, it sources much of its raw material needs from group companies, which holds it in good stead while negotiating prices.

But analysts point out that going forward pressure on margins will be even higher, now that prices of steel, rubber and plastic have gone up.

What's more, increased competition because of the entry of Honda later this year could cause the company to increase sales and marketing spend. In any case, advertising spend is set to be higher given the company's plans to launch a new product this fiscal.

The company has chosen not to give a sales target for FY05, which is wise because it has rarely come very close to meeting it "" it's either fallen short or beaten it by a big margin in the past.

Instead, it has said that volumes would grow between 10 per cent and 20 per cent, which according to analysts is achievable given the string growth in CD Dawn from rural and semi-urban areas. The only thing is that if the monsoons disappoint, the growth could be at the lower end of the range.

With contributions from Mobis Philipose