India?s second-largest IT services provider Infosys Technologies on Thursday doused market expectations with a flattish sequential performance in the third quarter ended December, but still sprayed some cheer, marginally raising its full-year revenue and EPS guidance. Though the tech bluechip did beat its own guidance given at the end of the September quarter, the Street had higher expectations of top and bottom line growth. The company attributed this to weaker economic recovery in developed markets.

In the seasonally weak December quarter, net profit climbed 14% to Rs 1,780 crore or Rs 31.14 a share compared to Rs 1,559 crore or Rs 27.30 a year ago. Profit rose just 2.5% over the September quarter and operating margins remained flat at 30.2% as rupee appreciation during the quarter offset an upside from pricing. Revenues inched up 24% over the corresponding quarter last year to Rs 7,106 crore. However, it moved up only 2.3% sequentially.

Dollar revenue guidance for the whole of 2010-11 was raised 1% to a range of $6.04 billion to $6.06 billion ? indicating a growth of 26% over FY10. EPS was pegged at Rs 118.68 to Rs 118.90 versus the earlier guidance of Rs 115 to Rs 117 a share.

Infosys shares, which opened at Rs 3,290 on the BSE lost Rs 162.65 or 4.82% following the announcement of its quarterly results to close at Rs 3212.30.

Infosys was also the biggest loser in the BSE IT index?where it has the highest weightage?which closed 3.41% lower. The firm reported continued momentum in verticals such as BFSI which grew 8% and manufacturing that jumped 10% but added warnings for the quarters ahead ?economic and unemployment recovery were still rated poor in some of the key markets and the risk of sovereign defaults loomed large. Infosys management said that the European debt crisis could spill over to the US clients would, therefore, remain cautious and spend more of their budgets on short-term projects, leading to uncertainties in the firm?s revenues. The firm reported some delays in project starts.

?Project sizes are typically small. However, the budgets are being finalised and we believe that the budgets are going to be slightly up. That is good for the IT services industry because the allocation of offshore is typically higher,? CEO and MD of Infosys Kris Gopalakrishnan said.

The Infosys management, however, commented that the next year could be a ?normal year? for the IT industry ?the industry could sustain its growth rate of 18-20% if the European debt crisis does not become contagious.

?In Europe, if something bad happens, the repercussions are global. That is what we need to worry about. But as of now, discretionary spending is back and will pick up during the year,? the CEO said.

Infosys? pipeline of small and large deals remains strong. Pricing upsides, thus far, have been sporadic and will take time to improve further, the management indicated. Analysts were not that impressed. Dipen Shah, senior vice-president, Kotak Securities said: ?The Q3 results of Infosys were marginally lower than our expectations. The management commentary reflects caution on the back of macro economic concerns. Thus, the Q4 and FY11 guidance are below market expectation. But the underlying fundamentals remain strong, in our opinion.?

CFO V Balakrishnan said margins held up well despite rupee appreciation due to capital inflows into the country as well as broader volatility in the global currency markets. The attrition rate, now at 17.5%, is slowing and may not be a worry in the quarters ahead. The firm added a net headcount of 5,311 employees during the quarter.