Why are markets disappointed with Infosys

The result season has got off to a disappointing start with IT bellwether Infosys reporting in line numbers for the first quarter. Infosys has been a darling of the investor community and analysts expect the company to better its margins quarter after quarter. That has not happened in the first quarter of this fiscal (2011-12). Infy's consolidated net profits for the first quarter have declined 5.3 per cent to Rs. 1,722 crore from Rs. 1,818 crore in the fourth quarter.

The consolidated revenue has grown 3.2 per cent to Rs. 7,485 crore in the first quarter from Rs. 7,250 crore in the fourth quarter. While the numbers have been ok, Infosys' muted guidance, especially a conservative growth in earnings per share (EPS), disappointed the Street.

The management has justified the conservative guidance. S D Shibulal, Chief Operating Officer of Infosys said global uncertainties have to be factored in.

He said: "This is a normal year but still there are uncertainties in the environment. If you look at consumer confidence, sovereign confidence...there is still tremendous weakness in those areas. If you look at Europe, there is uncertainty, unemployment. That is leading to a client behaviour which is pretty unique. While the budgets are there to spend, the decision making cycles are slightly longer. So, it is prudent for us to remain cautious."

"We are prepared for higher growth. Out utilisation is 74 per cent. We have enough people in the system. We have added 26 clients in this quarter. Our order pipeline is pretty strong."

Infosys' Chief Financial Officer V Balakrishnan said going forward the margins will continue to be under pressure because of the slowdown in the global economy.

"Typically in the first quarter, the wage increase comes into play and that affects margins by 3 percentage points. That is what has happened in this quarter and that is built in our guidance. We said in the beginning of the year that first quarter margins could decline by 4 per cent that took into account the wage increase what we were supposed to give. We came better than that .We have seen the margin decline by only 3 percentage points which is only because of the wages," he said.

EPS guidance

The earnings per share (EPS) for the quarter stood at Rs. 30.14 showing a decline of 5.3 per cent. The annual EPS is expected to be in the range of Rs. 128.20-130.08, a growth of 7.3- 8.9 per cent.

Revenue guidance

Infosys expects revenues to grow in the range of Rs 7,699- Rs 7,810 crore or between 10.8 per cent and 12.4 per cent on a year on year basis in the next quarter. For the full year, revenues are expected to grow 15.5-17.5 per cent in the range of Rs. 31,777- 32,311 crore.

Infosys, which has Goldman Sachs, BT Group and BP Plc among its clients, added 26 new clients during the quarter.

As of June 30, 2011, Infosys' cash and cash-equivalents, including investments in available-for-sale financial assets and certificates of deposit, stood at Rs 16,969 crore, as against Rs 16,005 crore as of June 30, 2010.

Infosys fell over 4 per cent and the BSE benchmark Sensex tanked over 300 points as investors sold off Infosys stocks. Other IT stocks also closed in the red. Analysts said the stock is likely to remain under selling pressure because of deepening concerns over European debt crisis and the sluggishness in the US recovery.

Commenting on the first quarter earnings, S. Gopalakrishnan, CEO and Managing Director of Infosys said, "We have re-organized the company to be more industry domain focused which will accelerate innovation and make us more responsive to clients' needs.”

Despite average numbers, Infosys said it will hire about 12,000 employees in this quarter. The company currently has over 1.33 lakh employees.

Infosys CEO and Managing Director S Gopalakrishnan said the company is looking to hire about 12,000 and it is continuing with yearly target at 45,000 people.

The results come in the backdrop of key management changes. NR Narayana Murthy will signoff the results for one last time before he calls quits in August. Director of HR TV Mohandas Pai has already quit and current CEO Kris Gopalakrishnan will also step down soon.