Infosys Q2 net up 18%, ups annual guidance

* Annual guidance revised upwards

* Net up 18.4% YoY; 1.9% up QoQ

* Income: Rs 4,106 crore; 19% growth YoY, 8.8% QoQ

* EPS: Rs 19.25; YoY growth of 15%

* Interim dividend: Rs 6 per share

* 48 new clients added

* Net employee addition: 4,530; total employees: 80,543 as on Sept.30, 2007

* Attrition touches 14.2% -- up 0.5%; Reason: employees going for higher studies

* Employee utilisation: 77.8% (excl. trainees); 70.3% (incl. trainees)

* Cash: Rs 7,319 crore as on Sept.30, 2007

* Rupee appreciation hit: Rs 2,000 cr over 1 year, being offset by $1.4 billion hedging and revenue productivity

* Focus on high-value services like consulting and package implementation

* Infosys BPO: Revenue - $53 million, Net income: $10 million, Attrition: 35%

* Still in talks for large BT deal (around $500-600 million)

* Over $1 billion deals in pipeline

* 12-14 deals in pipeline at any point in time; 70% of this is over $100 million

Bangalore-based IT bellwether Infosys Technologies today failed to excite Indian stock market investors despite posting a 18.4% increase in its consolidated net profit to touch Rs 1,100 crore (Indian GAAP) for the second quarter ended September 30, 2007 as compared to the same quarter of the last financial year.

Meanwhile, Infosys crossed the $1 billion mark in revenues this quarter with its top line rising 19% to touch Rs 4,106 crore implying a good volume growth. The numbers exceeded its quarterly guidance. Infosys had guided the street that it would grow its top line for the second quarter in the range of 14.5-15.7% on a year-on-year basis. However, on a sequential basis (compared with the previous quarter), Infosys' net profit grew only by 2% while its top line moved up 8.8%.

Infosys CEO & MD S Gopalakrishnan said: "Our margins (the company saw a 2.8% improvement in its operating margins or OPM this quarter) are very good. We see a positive growth for IT services. It appears to be stronger this year than before. We see more opportunities for growth as India continues to be preferred centre for IT& BPO services in the world. The second quarter was a significant milestone for us as we have seen robust growth in all the business verticals. The generally strong growth seen in the IT services sector is reflected in our performance."

However, the 19% growth in top line is a clear indication that the days of 30% plus growth rates are getting increasingly difficult as Infosys grows in size year on year. This is generally the company's seasonally best quarter, and the markets reacted sharply to the news. At the close of trading, the Infosys scrip was down almost 7% pulling down the IT index by 5.59%.

Going forward, Infosys has indicated its topline will grow by 3.2-3.7% on a sequential basis at the end of the third quarter ending December 31, 2007. It had earlier scaled down its year-end projections. The company has said that for the financial year 2007-08, it will grow its top line by 19.4-19.8% in the range of Rs 16,588 crore to Rs 16,648 crore.

To its credit, the company -- which sets the trend for the nearly $33 billion software exports industry from India -- has achieved this growth despite the strong appreciation of the rupee against the US dollar (almost 1.5% this quarter. Every percentage increase affects margins by 30-50 basis points). The company lost almost Rs 2,000 crore in revenue due to the currency appreciation over the last one year. Of this, Rs 527 crore was lost in the second quarter. It plans to tackle this by increasing its revenue productivity (around 1.9% this quarter). It is managing to get 3-4% higher billing from new contracts, and 2-3% higher billing from existing ones.

"We have been successful in countering the appreciation of the rupee against the US dollar. Abrupt changes in the rupee within a quarter can be a challenge for any company. To absorb Rs 2,000 revenue loss over one year on account of the rupee appreciation and still perform reflects our unique business model. We will continue to leverage this model to manage our margins better if the rupee swings either way," Gopalakrishnan said.

Incidentally, the US subprime crisis had very little impact on the company. Infosys BPO had four clients in the US mortgage industry and one has stopped working with the company. "We have compensated by increasing business with the remaining three clients who have banking services. Consequently, the reduction of business volume is very small," Infosys BPO chief Amitabh Chaudhury said.

Infosys added 48 new clients during the second quarter. It has a total of 520 clients with over 100 clients from Europe. Its top client contributed 7.9% of the revenues this quarter, while its repeat business was 97.7%. The BFSI segment accounted for 48%^of its revenues, while package implementation was 18.7%. Its consulting practice accounted for $241 million or around 5% of its "high-value" revenue. Meanwhile, the US still accounts for 62.7% of the company's revenues. Its European business accounts for around 27% of the revenues.

On the employee front, the company added 4,530 employees (net) this quarter. The figure was much lower than expected, but the management explained that its Mysore infrastructure was not in place because of which it could not hire almost 3,000 employees. The company still plans to recruit over 30,000 employees in the entire financial year. The attrition figures were higher by 0.5% (14.2%) this year. The managment said that 0.3% of this could be attributed to employees going in for higher studies.

Incidentally, the management said it was still in talks for a large BT deal (buzz is that the deal size is around $500-600 million). Besides, it has over $1billion deals in the pipeline. There are 12-14 deals in pipeline at any given point in time, according to the management -- of which, 70% comprise a value of over $100 million.