Infosys surprises with aggressive forecast

Written by fe Bureau | Bangalore | Updated: Jan 12 2013, 06:50am hrs
Information technology major Infosys on Friday pulled off a surprise by raising its revenue guidance for this fiscal to at least $7.45 billion from its previous projection of $7.34 billion, sending its shares surging by nearly 17% on the BSE. Infosys also posted a better-than-expected net profit on the back of eight large outsourcing deals valued at $731 million won during the October-December quarter.

Its performance in Europe was commendable; winning 13 new clients and growing the geography by over 16% in revenues during the quarter. Infosys shares on the BSE rocketed 16.9%, closing at R2,712.60 on Friday. This is its biggest gain since April 2001. Its share price in 2012 had slipped by 16.2% following a series of setbacks, even as its closest rival Tata Consultancy Services had surged by 8.2%. In that sense, it is a big turnaround in fortunes for Infosys.

The new forecast represents a 6.6% revenue rise from a year earlier. The growth outlook is inclusive of $104 million in revenue from Lodestone, a Swiss consulting firm it acquired last year. The companys net profit stood at $434 million (R2,369 crore) for the quarter, registering a flat growth sequentially. Analysts had expected Infosys to finish with a lower income.

JP Morgan in a note expressed the general mood. We are positively surprised by Infosys' performance and need to study the durability of the company's comeback, it stated.

Some analysts had expected Infosys to pare its annual revenue growth to 3.3% after the company had said last month that US clients had cut back on projects.

The firm's revenues in dollar terms rose by 6.3% sequentially and 5.8% year on year to $1,911 million. In rupee terms its revenues scaled up 5.7% sequentially and 12% on a year-on-year basis to R10,424 crore. Earnings per American depositary share (EPADS) forecast remain unchanged, at $2.97 at least.

We have done well in this quarter despite an uncertain environment, said SD Shibulal, CEO and managing director, Infosys. We continue to gain confidence from a strong pipeline of large deals. However, the broader economic environment remains difficult. Even so, we remain cautiously optimistic about the January-March quarter, he added.

The October-December period is widely regarded as the weakest quarter in the IT sector, owing to lower billing days due to the holiday season. That Infosys has managed to pull off its best showing during Q3 looks creditable. Excluding Lodestones contribution, Infosys' revenue grew to Rs 10,210 crore, recording a 3.6% sequential growth while year on year it was up 9.8%.

Overall, the company won 53 new clients during the quarter, of which 13 came from Europe. A total of 14 wins arose from its products and platforms vertical. Partha Iyengar, country manager, research, Gartner India, feels Infosys' results are finally coming closer to reflecting the demand reality. If this sustains for the next two quarters, that would indicate that the worst phase of the company is behind it, he said. It can then stand to benefit from the strengthening demand environment.

During the October-December period, the company reported an operating margin erosion of 66 basis points (bps) to 25.7% as against 26.3% in Q2, owing to a wage hike and closure during the holiday season. In Q2, Infosys doled out an average 6% hike for employees in India and will implement 2-3% increments for onsite employees in the fourth quarter.

Rajiv Bansal, chief financial officer, Infosys, said, The operating margin during the quarter was 26.1% excluding the charges of the Lodestone acquisition, which was a drop of 0.2% primarily due to the rupee appreciation. We managed to absorb the entire wage hike costs. Bansal said that the company is carefully looking at all expenses, adding that the idea is to create investments for future growth.

Pricing during the December quarter was up by 1.8% while volumes were up 2%. According to the management, the revision of guidance upwards was partly due to assuming the prices to remain flat at the beginning of the year. Infosys expects margins to drop by 1% in the fourth quarter due to the impact of wage hikes for onsite employees.

Ankita Somani, IT analyst, Angel Broking, said, This is a credible performance from Infosys after last eight quarters of disappointment. With the current set of results, there seems to be a case to re-rating Infosys.

Geography-wise, North America grew at a slow pace at 1.6%, while Europe, reeling under the recession, grew by 16.6%. India showed a robust growth of 44.7%. The rest of the world grew by 7.4%. Growth during the quarter in Europe has come from verticals like financial services, manufacturing and energy. We had three transformational wins in continental Europe, said BG Srinivas, head of Europe and manufacturing, Infosys.

The company pointed out that growth during the quarter was broad-based and across sectors. The banking financial services and insurance vertical grew by 6.4%, manufacturing by 4.6% and retail and life sciences by 6.6% while energy, utilities, communication and services showed the highest growth of 7.8% for the quarter.