Date:12/10/2007 URL: http://www.thehindubusinessline.com/2007/10/12/stories/2007101252251700.htm

Steady progress in Infy nos

Earnings growth may pick up pace over the next couple of years

The numbers downplay fears about an adverse impact on IT companies’ BFSI clientele from the US sub-prime crisis as well as a slowdown in the US economy.

K. Venkatasubramanian

With 20 per cent rise in stock price in the run-up to its results, the market seemed to be gearing for a positive surprise from Infosys numbers. But the actual numbers appeared to be on expected lines.

However, Infosys has managed to deliver a reasonable set of numbers for the second quarter of this financial year. The numbers downplay fears about an adverse impact on IT companies’ BFSI clientele from the US sub-prime crisis as well as a slowdown in the US economy.

Earnings growth

However, the earnings growth in rupee terms was at 18.4 per cent (over the previous year), suggesting gradual progress in offsetting the impact of a rising rupee on earnings.

A more narrow trading band for the rupee (Rs 39.5-40.5) this quarter, operational levers and growth in key value services have enabled Infosys to better its guidance after lagging it last quarter.

key business metrics

Though year-on-year growth has been impacted by the rupee factor, trends in service-mix, large order wins and progress in geographic de-risking are the positive trends in the numbers.

Services such as package implementation and consulting (together 24 per cent, are showing increasing contribution to revenues.

These are high value services and may help improve margins. Infrastructure management services and testing, services that are seeing much bigger outsourcing deals internationally, have also grown sequentially, indicating that Infosys has been able to tap into this opportunity.

The company is chasing large deals, especially in Europe, where it is seeing increasing traction.

A case in the point being its reported talks with British Telecom, for what is rumoured to be a $500 million size deal.

Telecom is a fast growing vertical in Europe and may see increased spending that Infosys may be well placed to tap.

This may also diversify currency exposures.

Fixed price contracts

The fixed price contracts proportion has increased 2.3 per cent points sequentially.

This can help predict cash flows and formulate a suitable hedging strategy as well as suitable resource deployment.

Increasingly, international clients are demanding such a pattern from Indian vendors. Operationally, the second quarter is usually a strong one for companies such as Infosys and there were expectations of a double-digit sequential growth in revenues to compensate for a flat previous quarter.

But as indicated earlier, earnings growth for Infosys may pick up pace over the next couple of years, once the rupee effect is mitigated.

In this regard, the revised EPS guidance (pegged to an exchange rate of Rs 39.5) for the financial year at Rs 79.88 appears within reach.