Infosys cautious on recovery; flags currency risk

Infosys Technologies, India's No 2 software services exporter, forecast stronger-than-expected annual revenue growth of 16-18 percent, noting that a pick-up in global technology spending was improving demand for outsourcing.

However, a firming rupee on the back of rising foreign investment in India's fast growing economy may keep earnings growth muted for outsourcers, and Infosys expects its profit margins to take a hit this year.

"The results show that although there is buoyancy on the business front, there is pressure on margins," said Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher. 

"This pressure is not likely to go away as the rupee is still appreciating," he said. "I wouldn''t buy Infosys at this point in time. I''m underweight on the IT sector."

Kicking off the earnings season for the $60 billion sector, Infosys CEO S Gopalakrishnan said in a statement that the economic environment is expected to remain challenging.

Infosys, sector leader Tata Consultancy Services, and third-ranked Wipro have revived hiring, signalling improving demand for the outsourcing sector.

Infosys added 47 clients in January-March, its strongest pace of additions in seven quarters, taking the total tally to 575.

Infosys, which counts Goldman Sachs, BT Group and BP among its customers, expects its dollar revenue to rise 16-18 percent in the year that started on April 1. Most brokerages were expecting growth of 12-15 percent.

Bangalore-based Infosys, set up in 1981 with $250 borrowed from the spouses of their seven founders, expects earnings per share to rise 4.3-8.6 percent for the full year.

But the strengthening rupee, which rose 3.6 percent against the dollar in January-March after gaining 4.7 percent in 2009, higher wages and competition from global firms such as IBM and Accenture are key risks for the industry.

"Infosys is known to be the best manager of margins in the industry," said Srivathsan Ramachandran, analyst at Spark Capital Advisors. "If we are going to see margin pressure it is going to be right across, it is not going to be Infosys specific." 

Infosys shares, valued at $35 billion, fell as much as 1.8 percent in a broader Mumbai market down 0.5 percent, and traded flat by 0445 GMT. Trading in the stock was almost four times the normal daily average.

Infosys, which develops technology applications, designs supply chains and provides backoffice services, said on Tuesday its January-March net profit fell to 16.0 billion rupees ($361 million) from 16.15 billion a year ago.

Profit for the latest quarter included 480 million rupees from the sale of the company's investment in OnMobile Systems Inc, Infosys said. 

A Reuters poll had estimated profit of 16.05 billion rupees. Revenue rose 5.5 percent to 59.44 billion rupees.