Just when everyone thought the Indian software industry was trundling back to normalcy, lightning has struck in the form of dwindling European revenues. Infosys?s net profit dipped 2.4% in the April-June period, much against the run of play, with stiff headwinds like higher tax expenses and wage hikes also curtailing the momentum. Analysts had placed bets on Infosys bettering street expectations as usual but this time it came up short, leaving the experts worried about the sector?s near-term fortunes. The disappointing outcome is a stern reminder of post-recessionary blues, as key clients continue to hold their purse strings tight. Infosys has said that the uncertain economic environment will affect its billing rates this fiscal, sounding a warning bell for all IT firms waiting to announce their results.
The European debt crisis has played a bigger part than one expected in the first quarter, and that?s a whole new development. Infosys?s top management has expressed concern over the declining European revenues, with verticals like manufacturing, which has a large exposure to the continent, taking a severe beating this time. The continent accounted for 20% of the total Infosys revenue in the first quarter, dropping from a 23% share recorded during the same period last year. Its business from Europe declined by 5.3% sequentially.
Some analysts have said that contract re-negotiations with companies like British Telecom have also played a role, although the company has not confirmed it. In the first quarter, billing rates fell 1.6% and the talk is that it is likely to decline 2% for the fiscal. The chief financial officer of the company, V Balakrishnan, said steep competition and weak demand prompted Infosys to cut prices and win business from customers in the US and Europe. Customers are asking vendors to do more with less, which translates into discounts. No wonder there were no deals in the $50 million-plus bracket during the quarter. Operating margins dropped to 28.3% from 30.1% during the previous quarter.
The sharp rise in staff costs (average wage hike of 14%) has also contributed to the profit plunging to Rs 1,488 crore. Margins show a downward spiral during the wage hike quarter, but then it is expected to recover through the year as cheaper resources join in. Despite the hikes, Infosys saw its attrition rising to 15.8%, which should concern HR head Mohandas Pai.
The company will now also see about 80% of its revenues taxed compared to 70% in earlier years. This year the effective tax rate would be about 25% of the profits-before-tax, compared to 21% the previous year. The current scenario is attributable to the firm moving out of the STPI scheme, which offered tax sops for 10 years, ending this fiscal.
The fluctuating foreign exchange scenario has also been a matter of concern. The dollar has gained nearly 8% against the euro and around 5% against the pound sterling during the first quarter. The euro has also slipped against the rupee over the last six months. Since Indian IT firms earn most of their revenues in these currencies, they expose themselves to greater risks. The interesting part of the equation is that Infosys has guided upwards with regard to its annual revenues, on the back of some encouraging client feedback. Volumes grew steadily in the first quarter (7.6% sequentially) despite challenges, pushing the revenues north by 13.3% to touch Rs 6,198 crore. These factors have given some confidence to the company, which has revised its annual earnings forecast to Rs 26,441-26,885 crore. During the March quarter, the company had guided for a 9-11% growth, which it has revised to 16.3-18.2%. Analysts are relieved by these numbers, as they point towards some great performances in the following quarters.
Infosys is traditionally rated as a conservative company that promises little and delivers big. Against that backdrop, the steep revision of the annual revenue guidance is certainly a bold move. This is a great show of confidence by the company, which augurs well in the medium term.
Infosys has been well supported by its ever-growing North American revenues, which now contribute 66% of the revenues. The improved performance from the banking, financial services and insurance (BFSI) sector has streamlined the revenues from that part of the world. BFSI contributed 36% of the revenues. Analysts believe that the encouraging guidance has lots to do with growing dollar revenues. Research firm Forrester has said that top US customers, like GE and Citigroup, are expected to spend over $90 billion on IT outsourcing this year, thereby reducing their operational costs by up to 30%. There is still hope.
dj.hector@expressindia.com