Infosys Technologies, the country?s second largest IT services firm, has reported a 2.4% decline in net profit for the quarter ended June 30, 2010, compared to the year-ago period. Currency volatility, reduced demand from Europe and higher income tax expenses had their impact on the net profit. The result has surprised analysts and industry watchers, who predicted that Infosys would be able to power its way despite these factors. The drop in profit signals that the IT world is still feeling recessionary pangs, though analysts did not give it much thought. Infosys shares on the Bombay stock Exchange (BSE) closed at Rs 2,795.30 on Tuesday, a fall of 3.44%.

Infosys, however, has raised its full year revenue forecast, expecting greater outsourcing demand in the remaining part of the year on the back of ?positive? client feedback.

The firm has posted a consolidated net profit of Rs 1,488 crore, or Rs 26.06 per share, during Q1 FY 11 compared with Rs 1,525 crore for the corresponding quarter last year. Revenues increased 13.3%, from Rs 5,472 crore to Rs 6,198 crore, driven by banking and financial services, retail and services such as application maintenance support. Revenues from North America also rose, covering for Europe to some extent.

On a quarter-on-quarter (Q-o-Q) basis, the net profit declined 7% while revenues moved up by 4.3%. In dollar terms, the firm grew 4.8% sequentially, in line with what FE had predicted.

Infosys has revised its consolidated revenue guidance for this fiscal upwards, in the range of Rs 26,441 crore to Rs 26,885 crore, projecting up to an 18.2% growth. The guidance has been revised from a 10% growth projected in April. The full year EPS is now expected between Rs 112.21 and Rs 116.73, up from the earlier projection of Rs 111.

CEO Kris Gopalakrishnan termed the results ?excellent? but tempered it with a caution on Europe. The continent, which contributed 20.3% to the firm?s revenues in Q1, down from 24.7% in the year-ago period, will continue to remain sluggish. ?There are distant clouds on the horizon. I have no idea if it is a cyclonic storm,? he said, referring to the sovereign debt crisis that could possibly affect the financial system in Europe going ahead. ?In spite of a good quarter, everything is not positive. In the short-term, there is a lot of confidence about the guidance and our own business. But in the medium to long term, we have to watch. If something worse happens in Europe, that will have an impact.?

Infosys has had little direct impact because of the debt crisis ? the firm has less than 1% exposure to the PIIGS nations ? Portugal, Italy, Ireland, Greece, and Spain. ?But overall, Europe is in a slow growth environment and businesses are cautious about investing,? the CEO said.

He said the firm was hopeful of balancing declining European revenues from higher growth in the rest of the world, particularly North America, which contributed 67.3% during Q1, up from 64.7% in the year-ago quarter.

V Balakrishnan, chief financial officer, admitted that the volatile currency environment is a concern for the industry. Its forex losses stood at Rs 20 crore. The firm?s operating margins declined by 1.8% to touch 28.3%, mainly because of currency fluctuations. During the quarter, rupee appreciated 0.7%, impacting margins by 0.3%. Cross-currency movements had a 0.6% impact while lower billing rates hit margins by 0.3%. The impact from higher wages was 3%. The hit was partly offset by higher utilisation, which resulted in a 2.2% positive impact on the margins, the CFO said.

Higher tax rates will continue to pressurise the bottom line as more SEZs come out of a tax holiday this year, he added. The firm?s income tax expense for the quarter jumped 30% over the year-ago quarter. On the brighter side, the company expects pricing to remain stable.