Infosys Revenue, Earnings In Rupee Terms Up, But Miss Expectations, Net Profit In Dollar Terms Decline; Ups Yearly Revenue Forecast

Infosys (NYSE:INFY), India’s second-largest IT services exporter, which generates a bulk of its revenues from North America, missed expectations on second-quarter net profit and revenues, but raised the lower end of its revenue guidance for the fiscal year ending in March. The company also announced that it has entered into partnerships with health care and public sector organizations in the U.S., and has bagged an order related to the U.S. Affordable Care Act.

Infosys’ consolidated net profit for the fiscal second quarter ended September rose 1.6 percent to 24.07 billion rupees (about $392 million) from 23.69 billion rupees recorded in the year-ago period, falling short of the 26.26 billion rupees predicted by analysts polled by Reuters. Net profit was hit by a one-time provision of 2.19 billion rupee for "visa related matters." Consolidated quarterly revenue jumped up by 15.1 percent sequentially and by 31.5 percent year-on-year to 129.65 billion rupees and the company attributed the growth to stable pricing and a growing client roster.

"During the quarter we witnessed broad-based volume growth, robust client additions, five large deal wins and increased sales momentum of our big data and cloud offerings. This growth is a result of our focus on execution, which helps our clients achieve their objectives," S. D. Shibulal, Infosys’s CEO and managing director, said.

Like most export-oriented companies, Infosys also benefited from a week rupee, which averaged about 62.77 during the second quarter.

“The global currency market remains volatile with the Indian Rupee depreciating by 11 percent during the quarter. We have an active hedging program to minimize its impact on our margins. We will continue our focus on optimizing costs and enhancing the efficiency of our operations,” Rajiv Bansal, the company's chief financial officer, said in a statement.

However, Infosys’ net profit in dollar terms registered an annual decline of 11.1 percent to $383 million for the quarter, while net profit witnessed a sequential decline of 8.4 percent. In dollar terms, the company's total revenues for the second quarter stood at $2.07 billion, registering a year-on-year growth of 15 percent and a sequential growth of 3.8 percent.

The company raised the lower end of its full-year guidance for the fiscal year ending 2014 and it now expects its revenues to grow by 9 percent to 10 percent in dollar terms, compared to its previous guidance of 6 percent to 10 percent, while it revised its revenue forecast in rupee terms to a range of 21 percent to 22 percent from its previous estimate of 13 percent to 17 percent.

Infosys and its subsidiaries added 68 clients during the second quarter, and hired a gross total of more than 12,000 employees during the period. The company also declared an interim dividend of 20 rupees-a-share for the financial year 2013-14, which it expects to pay on Oct. 18.

Infosys Shares Soar More Than 5 percent; But Economists Apprehensive Of Company's Future Growth

Infosys stocks soared 10 percent in pre-market trade on the benchmark BSE Sensex, but markets’ apprehension that the company may not sustain its growth levels in subsequent quarters dampened enthusiasm, pulling down the shares to subsequently trade up 4.4 percent during early-afternoon trade.

“Revenue has come in much stronger than expected but guidance is not all that good. Margins have been a little disappointing… I don’t think given the change in strategy margins are going to rise much,” Vibhav Kapoor of IL&FS told CNBC- TV18.

Infosys had reported better-than-expected earnings for the June quarter, after reporting a series of disappointing performances in the 2013 fiscal year. The company in an attempt to regain its lost glory has brought back co-founder and ex-chairman N.R. Narayana Murthy to head the company. Since he took charge in June, Murthy has implemented structural and policy reforms in the company in a bid to win back its position as an industry leader.

Recovery in the U.S. to Benefit Infosys

A slow but sustained recovery in the U.S. is expected to significantly benefit Infosys, which makes 62 percent of its revenues from North America. In the current quarter, the company recorded a sequential growth of 4.9 percent in its North American market, while its growth in Europe declined by 3 percent sequentially.

The company said that it is partnering with leading health care and public sector organizations through Infosys Public Services Inc. in the U.S. and announced that it has “been selected by a multi-state Medicaid/Medicare Plan to implement a solution that meets shared member liability management requirements, as mandated for participation in health exchanges under the U.S. Affordable Care Act.”

However, a major challenge for Infosys and its Indian peers would be the proposed changes to U.S. visa policies -- including raising processing fees to double the current amount and capping the number of work visas -- that could severely constrain its operations in one of its biggest markets and hurt the company’s future profitability.