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Saturday, July 14, 2007

Infosys... poor results, grim outlook


A 7% gain in the rupee since April knocked Rs2.76bn off Infosys' topline in the first quarter. Gross margins were down 390 basis points while EBITDA margins fell by 300 basis points. Overall volume growth stood at 6.9% while revenue growth was flat QoQ at Rs37.73bn (vs Rs37.72bn). PAT of Rs10.79bn was boosted by other income of Rs2.53bn (coming from forex gains and higher interest rates) and Rs510m of tax write-backs. EPS declined to Rs18.89 from Rs20.30 in the fourth quarter of FY07. Excluding this reversal, the EPS for the quarter would have been Rs18.

The company missed its revenue guidance for the first quarter. It had given Q1 revenue guidance of Rs38.96-39.13bn while reporting its full-year results in April. On the bottomline however, Infosys has surpassed its own EPS guidance of Rs17.84. Infosys cut its full year earnings and revenue guidance in rupee terms considering the sharp appreciation in the Indian currency vis-a-vis the dollar. At the same time, the IT giant marginally hiked its FY08 guidance in dollar terms.

"The sharp appreciation of the rupee against all major currencies impacted our operating margins during the quarter," said V. Balakrishnan, CFO, Infosys. "However, our robust and flexible operating and financial model enabled us to maintain our net margins while absorbing the impact of appreciating currency, higher wages and visa costs." Given the continuing strength in the rupee, the IT sector's misery is unlikely to end soon. Such has been the impact of the rupee that the sector has gone out of favour with most investors. Infosys and the software sector will continue to underperform the market as there is a likelihood of some more pain going forward.

Govt to bail out other exporters

The Government has thrown in a life jacket at the beleaguered exporters, especially the small and medium sized companies, to cushion them from the adverse impact of the sharp appreciation in the rupee this year. The Rs14bn package includes hike in both drawback and Duty Entitlement Passbook (DEPB) rates, besides cheaper pre-shipment and post-shipment loans to SMEs from banks. Commerce Minister Kamal Nath stated that the new DEPB rates are expected to help sustain the export growth. He expressed hope that the package would neutralise the adverse impact of rising rupee on exports.

DEPB rates have been enhanced by 3% for nine sectors i.e., textiles (including handloom), readymade garments, leather products, handicrafts, engineering products, processed agricultural products, marine products, sports goods and toys. For the rest of the items, DEPB rates have been enhanced by 2%. ECGC premium has been reduced by 10% of the existing premium rates. To clear all arrears of terminal excise duties and CST reimbursement, an amount of around Rs6bn has been released. The rates of duty drawback has been enhanced by around 10% to 40% of the existing rates. The rate of interest on pre and post-shipment credit has been reduced by 2%. Responding to requests from exporters, the Government has introduced some additional lines in the Drawback Schedule.

The higher rate of duty drawback would cost the exchequer Rs8bn in FY08, while the Government would bear another Rs6bn to provide a 2% subvention to banks for providing concessional credit to exporters in certain sectors. The subvention would be provided to the banks through the Reserve Bank of India (RBI). The central bank is being requested to issue a circular to the scheduled commercial banks in this respect.