The European debt crisis and a steep rise in operating expenses took the shine off the first quarter results of Infosys Technologies, usually the first major Indian company to announce its quarterly results. A 7% drop in net profit sequentially and a 2.4% drop YoY impacted the markets, overshadowing the company?s buoyant revenue guidance for the financial year. The stock market was surprised as it was betting on a strong performance by the country?s second-largest software company to guide the Sensex past 18,000 at close, a level it has not reached for more than two years. The upward revision of Infosys?s revenue guidance of $5.72 billion to $5.81 billion in FY11?a growth of 19-21% YoY?is quite upbeat, as it has not projected such a rise since 2007. This indicates that the markets are factoring in the fallout of the European debt crisis as the continent is the second-largest market for Indian outsourcers after the US. Indian IT companies will have to live with this prolonged crisis, which will crimp their revenue. In fact, a report from research firm Forrester last month had warned that Europe?s volatile economic situation and uncertainty about corporate IT budgets would result in possible delays or cancellations of some outsourcing projects. On the brighter side, Infosys Technologies saw its revenue increase by 4.2% sequentially on the back of better demand from the US, despite a weaker euro. Though the volatility in the currency markets and weak pricing may have hurt the bottom line of the IT bellwether, the recovery in the US suggests that outsourcing is gradually gaining currency once again after the global financial crisis and companies are looking at this model to reduce their costs. This augurs well for Indian IT companies and they will have to make strong investments in manpower training and move up the value chain to grab a bigger slice of the pie of the global outsourcing business.
Interestingly, Infosys?s revenue from banking and financial services, the industry that was the worst hit during the global financial crisis, has increased 8.8% sequentially. This is better than 5.9% a year ago. During the quarter, the company also added 38 new clients and saw marginal improvement in the domestic business. However, the company?s net addition of 1,026 employees in April-June, which is its slowest pace of addition in four quarters, indicates that the recovery is still at a nascent stage. A clear picture for the Indian IT sector will emerge once the other IT companies report their results. But going ahead, the trend for the result season may be evident in the IIP numbers rather than in the results announced on Tuesday.
