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Infosys manages slight first-quarter profit increase, labour costs cloud outlook

BENGALURU/MUMBAI (Reuters) - Infosys Ltd, India’s No. 2 software services exporter, eked out a slight rise in first-quarter profit, although the outlook for more earnings gains remains cloudy due to higher labour costs and unfavorable currency rates.

FILE PHOTO: An employee of Infosys stands at the front desk of its headquarters in Bengaluru, India, April 15, 2016. REUTERS/Abhishek N. Chinnappa/File Photo

India’s more than $150 billion software services sector faces headwinds in its biggest market, the United States, as clients hold back technology spending amid concerns about President Donald Trump’s review of a visa programme for highly-skilled workers.

Net profit rose 1.4 percent to 34.8 billion rupees ($540 million) in the April-June quarter from a year earlier, just a tad above expectations.

Infosys retained its annual revenue outlook at between 6.5 percent and 8.5 percent growth on a constant currency basis.

But Mumbai brokerage Emkay said in a client note that the company’s failure to lift its revenue guidance indicated first-quarter pricing gains were not sustainable and profitability could see a “downtick” in the coming quarter on lower growth, wage hikes and rupee appreciation.

After Trump targeted outsourcing firms, Infosys said in May it plans to hire 10,000 U.S. workers in the next two years - a move that will likely lead to higher labour costs. It is also due to give annual salary increases to employees this month.

“We’ll be announcing the compensation hikes and we are also ramping up the U.S. talent model,” Finance Chief M.D. Ranganath told reporters.

The rupee has also risen 5.4 percent against the U.S. dollar this year, adding to the woes of outsourcers who bill for the majority of their services in foreign currencies.

But Infosys fared better than bigger rival Tata Consultancy Services which missed analysts’ expectations on Thursday with a 6 percent drop in first-quarter profit.

Shares in Infosys, valued at about $35 billion, ended 0.5 percent lower.

Infosys has had a rocky year with some founders and former executives of the company publicly accusing its board of governance lapses and urging it to reward shareholders through a share buyback.

The company plans to return about $2 billion to shareholders this financial year, but has yet to detail the manner of the payout. At end-June, Infosys had a record $6.1 billion cash balance, Ranganath said.

IT outsourcing firms are also facing pressure as traditional businesses such as routine infrastructure maintenance are seeing their margins squeezed as clients demand more work for less money, pushing the sector to develop cloud, data analytics and cyber security services.

Infosys lost one client in its $100 million category during the quarter from the previous quarter, but total active clients rose by a net of 2 to 1,164.

($1 = 64.4550 Indian rupees)

Reporting by Arnab Paul and Sankalp Phartiyal; Additional reporting by Swati Bhat; Writing by Devidutta Tripathy; Editing by Stephen Coates and Edwina Gibbs