Infosys Q2 profit up, outlook eases market worries

BANGALORE Wed Oct 12, 2011 11:02am EDT

BANGALORE (Reuters) - Infosys Ltd (INFY.NS), India's No.2 software services exporter, reported a 9.7-percent rise in quarterly profit and cut its full-year sales outlook by less-than-expected, easing investor worries of a sharp slowdown in the outsourcing sector.

Kicking off results for India's nearly $76 billion IT sector, Infosys shares ended 7 percent higher on Wednesday to their strongest level in more than two months, outperforming a 2.5 percent rise in the broader Mumbai market .NSEI.

The company, which counts Goldman Sachs (GS.N) and BT Group (BT.L) among its main clients, trimmed its dollar revenue growth forecast to 17.1 percent to 19.1 percent for the fiscal year, from 18 percent to 20 percent projected earlier.

"The dollar revenue guidance cut is due to a cut in discretionary spending by clients. But it was modest compared with what people had expected," said Jagannadham Thunuguntla, research head at SMC Global Securities.

He said analysts had expected Infosys to slash its dollar revenue outlook by 4 to 5 percentage points.

Shares in sector leader Tata Consultancy Services (TCS.NS) gained 3.7 percent and No. 3 Wipro (WIPR.NS) rose 2.6 percent.

"In constant currency terms the original guidance of 18 to 20 percent is to remain as the cut is on account of the dollar appreciating against the euro and the pound," Nomura analysts said in a report on Infosys.

Infosys' quarterly profit was in line with estimates after it lagged expectations in the previous three quarters. Its premium gap with bigger rival Tata Consultancy Services (TCS.NS) has narrowed in recent months as it lagged in earnings growth.

Infosys added 8,262 staff in the quarter ended September - its highest pace of quarterly staff addition in at least four years. The company maintained its previous forecast of adding 45,000 people in this fiscal year.

"The hiring number indicates that the company sees strong growth ahead despite economic uncertainty. Whether this assumption is right or wrong, we have to wait and see," said Ankur Rudra, an analyst with Ambit Capital.

Nasdaq-listed Infosys INFY.O said consolidated net profit rose to 19.06 billion rupees ($387 million) for the fiscal second quarter ended September 30, from 17.37 billion rupees reported a year ago, as a weaker rupee boosted results.

Revenue rose 16.6 percent to 81 billion rupees as the company added 45 clients in the quarter.

A Reuters poll of brokerages had forecast a profit of 18.9 billion rupees on revenue of 81.2 billion rupees for the company.

India's IT sector, which feeds off increased outsourcing by companies looking to cut costs, is expected to face pricing pressure and a decline in new orders as Europe struggles with a debt crisis and the United States sees an economic slowdown.

Infosys and its local rivals also face stiff competition from global players including IBM (IBM.N) and Accenture (ACN.N) for large outsourcing deals from global corporations.

Infosys Chief Financial Officer V. Balakrishnan said the reduction in forecast was mainly due to currency volatility.

Balakrishnan said the sovereign debt crisis in Europe was a "big issue" and a slowdown in the United States and European economies could impact spending on technology services by its clients.

Europe is the second largest market for India's software firms, which have been looking to increase their sales to the region to hedge against their excessive exposure to the United States that accounts for more than half their sales.

UNCERTAINTY

"The global macroeconomic environment is still uncertain. It is and should be a concern for the IT industry," S.D. Shibulal, chief executive officer of Infosys, said in a statement.

"There is uncertainty and unemployment in the U.S. and Europe, there is uncertainty in the financial and banking segments. So all these are leading to customers being more cautious in their investment decisions, more thoughtful about the areas in which they invest," Shibulal told reporters.

Infosys earned 65.3 percent of its revenue in the second quarter from the United States versus 65.8 percent from a year ago, while Europe accounted for 20.5 percent of its revenue, down from 21.8 percent a year ago.

The company expects its dollar revenue to rise to $7.08 billion to $7.2 billion in the fiscal year ending March 2012, down from its forecast of $7.13 billion to $7.25 billion in July.

It raised its earnings per American shares growth forecast for the full fiscal year to 15.3 to 16.8 percent from 10 to 11.5 percent guided in April.

Infosys CFO Balakrishnan said the company's operating margins in the current quarter could rise 1.6 percent due to a weak rupee, which has fallen 11 percent since August when it touched its 2011 high.

The company, however, expects margins for the full year to drop about one percentage points from a year ago due to higher wages.

"The results have been helped partly by the depreciation in the rupee. The main thing to watch out for will be how the U.S. and Europe will move in the coming months," said R.K. Gupta, managing director at Taurus Asset Management.

Infosys, worth about $29 billion, has lost more than a quarter of its market value this year, roughly in line with a 25 percent fall in the sector index and versus a 19 percent decline in the Mumbai market index. ($1 = 49.3 rupees)

(Additional reporting by Devidutta Tripathy and Prashant Mehra; Writing by Sumeet Chatterjee; Editing by Jui Chakravorty and Anshuman Daga)