If any more proof were required about the gradual but steady recovery in the IT sector, Infosys delivered it on Tuesday in ample measure. Its third quarter revenues of Rs 5,471 crore stood 5% over the top end of its guidance for the quarter, enabling the information technology bellwether to revise the full-year guidance upwards, signalling a likely turnaround in fortunes for the $60-billion Indian IT outsourcing firmament.
For the first time in the last three quarters, the Nasdaq-listed company is expecting positive growth in dollar revenue and positive earnings growth in dollar and rupee terms, indicating a changed macro-economic environment. In rupee terms, the company now expects a revenue growth of 3.6-3.8% for FY10 (from 1.2-1.7% earlier) and 1.8-2% in dollar terms on a yearly basis, with the rupee estimated at Rs 45.75 to the dollar.
Now this is exactly what the industry wanted to hear, and if its cross-town rival Wipro and Mumbai brethren TCS also go the same way, it will not be too long before the ills of last year seem part of the folklore.
A closer look at Infosys?s Earnings Per Share (EPS) reveals how the sentiments have changed. The FY10 EPS has been revised upwards to Rs 107.06 on the upper band, which surpassed street expectations by some distance. This is a good indicator of a more stable pricing environment and greater flow of orders. Analysts view this as a sure sign of recovery and are predicting a similar result for the rest of the tier-1 software cross-section. Pricing has been a worry throughout the last season for all players, but the first signs of them getting fixed have emerged.
Its quarterly net profit has fallen for the first time on a year-on-year basis, but the industry has not read too much into it, considering it has been a tough season that also houses the festive period.
It is now perfectly possible for Infosys to post a near 20% growth in revenues in FY11, with such positive sentiments breaking through. The fact that the banking, financial services and insurance (BFSI) sector has bounced back in the US has contributed significantly to Infosys?s fortunes in Q3 and that?s really great news. BFSI has rebounded much faster than expected and considering that 60% of India?s IT export revenues come from the US, it was important that this particular vertical came out of the woods soon. One can already see Nasscom chief Som Mittal beaming.
The Infosys top management has said that one deal was worth over $200 million. Now that?s something one has not heard of in recent times and has sweetened the first results of the season considerably. For a long time, software services firms, including the top-tier ones, have been left looking at sub-$100 million deals, with transformational contracts being few and far between. Now it could all change.
Management at Wipro has been talking about how it was difficult to hold on to pricing last year, and how they had to push for more Indian clients who could be pursued a little more easily into accepting a more rigid price. But with the scenario changing, Wipro could now announce some huge deals, especially in West Asia, its traditional strong fort.
Verticals such as manufacturing and telecom are still struggling, but the demand strength is reflected in the employee utilisation levels going up by 3% to 76%, quarter-on-quarter. The bench has been reducing over the last few months and the coders can now very well shut their Facebook pages and get on to some serious code writing.
Infosys?s net profit grew almost 3% over Q2 to Rs 1,582 crore. Still it had to settle at about 4% below Q3 numbers of last year, thanks to a 3.7% rupee appreciation in the quarter. Higher employee spends did not help either. Despite this, operating margins moved north by 90 basis points sequentially and 40 basis points year-on-year to 35.5%, bringing cheer to the street.
Wipro and TCS are also bound to face the rough cross-currency winds, and it would be interesting to see how well they have been able to protect their margins. It would also be significant to see how the smaller IT players would fare. During the downturn they have been smart enough to move quickly and snap up some new contracts, but the real battle will begin now.
Some analysts feel that Info-sys may have guided conservatively, but that is something that the company has become famous for. Also, most clients finalise budgets around February, which is when greater visibility would emerge. In any case, Infosys has always prided itself on under-promising and over-delivering. Bring on TCS and Wipro now. Indian IT suddenly seems to be dancing on its own two feet.
dj.hector@expressindia.com