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Strong Rupee Does Not Dampen Outlook At Infosys

Posted on Tuesday, Oct 13th 2009

Just when it seemed as though the Indian IT industry might be getting a breather, players now have to deal with the rising rupee, which stresses the margins and revenues of export-oriented firms. Earlier this month, the rupee reached a 52-week high, sending worry signs in the Indian sector. But despite such concerns, the number two outsourcer in India, Infosys (NASDAQ:INFY), gave an optimistic outlook in its recently published Q2 results.

Q2 revenues of $1.2 billion grew 3.1% over the year while earnings fell 0.9% to $317 million driven by a stronger rupee. EPS came in at $0.56 and was in line with the market’s expectations.

Growth came from the BFSI, retail, and energy and utilities segments while manufacturing lagged. Within the BFSI segment, the company had opportunities to work with clients on system integration. Infosys won 35 new clients during the quarter, and their top 10 client base grew by 6% over the year. Volumes grew 2.3% in the quarter, with on-site volumes growing by 0.5% and offshore volumes by 3%.

Improvement in the North American market and the currency movement helped drive up the revenue contribution from North American clients. North America contributed 66% of the quarter’s revenue compared with 62% a year ago while Europe’s share fell from 28% to 23% in the quarter.

The company believes that the climate has improved, and clients are looking to invest in “strategic initiatives and relationships to maximize value from opportunities when the economic downturn ends.” Based on its client survey, Infosys estimates that customers’ IT budgets will shrink by 6-8% over the year. But the pricing environment seems to have stabilized, and there was a 0.4% growth in the blended pricing. However, in constant currency terms, there was a marginal 1% reduction in prices.

As a reflection of this growth, Infosys added 1,548 employees during the quarter, taking the headcount to nearly 105,500 by the end of the quarter. They also increased their gross hiring projections for the year and now plan to hire 20,000 people during the year compared with the 18,000 projected earlier. They are also giving the earlier deferred wage hikes to their employees and announced an average 8% increment for offshore employees and a 2% increment for onsite employees.

Last quarter, most IT players had been working on improving their utilization rates. Infosys managed to improve theirs to 73% during the quarter from 70% a quarter ago. Attrition also reduced marginally from 12.8% a year ago and 11.1% a quarter ago to 10.9%.

The company is currently pursuing 12 to 15 outsourcing deals and with M&A having picked up in the sector, Infosys is itself looking to purchase companies with revenues of nearly $400 million.

The company projects revenues for the year to fall 1.0% to 1.3% to $4.60 million to $4.62 billion with EPS expected to fall by 6.7% to 7.1% over the year to $2.09 to $2.10. Earlier this year, Infosys was projecting a revenue decline of 3.1% to 4.6% with earnings to drop by 11.1% to 12.4% over the year.

Their stock is trading at $47.74, taking the market capitalization to $27.4 billion.

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