Infosys bets on technology spend; flags currency risk

By Sumeet Chatterjee

BANGALORE (BestGrowthStock) – Infosys Technologies’ (INFY.BO: ) stronger-than-expected annual sales forecast suggests a gradual recovery for India’s IT services sector as global clients loosen their purse strings in an improving economy.

An appreciating local currency and salary hikes, however, could check profit growth for the country’s $60 billion sector, a magnet for tens of thousands of young job-seekers.

Infosys shares, valued at $35 billion, rose as much as 3.7 percent by 0900 GMT on Tuesday with more than 1.6 million shares traded, more than 15 times the daily average over the last 30 days.

“I think recovery is omni-present and they will get a bigger slice of recovery,” said R. Ravi, a sector analyst at Daiwa Capital Markets.

Kicking off results for the showpiece sector in which entry-level engineers are paid $550 per month on average, five times cheaper than their counterparts in developed countries, Infosys CEO S. Gopalakrishnan said the economic environment remains challenging.

Industry leader Tata Consultancy Services (TCS.BO: ), Infosys and third-ranked Wipro (WIPR.BO: ) have revived hiring and are competing for staff and orders with IBM (IBM.N: ), Accenture (ACN.N: ) and Hewlett-Packard (HPQ.N: ).

Technology researcher Gartner has forecast a 5.3 percent rise in global IT spending in 2010 to $3.4 trillion, after a 4.6 percent fall in 2009.

“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, which counts Goldman Sachs (GS.N: ), BT Group (BT.L: ) and BP (BP.L: ) among its customers, forecast 2010/11 revenue to rise 16-18 percent in U.S. dollars, higher than the 12-15 percent target expected by most brokerages.

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 after a 150 basis point drop in margins.

Profit for January-March, its fiscal fourth quarter, eased 0.9 percent, largely in line with market expectations, to 16.0 billion rupees ($361 million) from 16.15 billion a year ago.

Infosys, whose sprawling Indian campuses house pizza and Subway outlets and golf courses, aims to hire 30,000 people in the year that started on April 1, as it reported its strongest pace of client additions in January-March.

Last month, technology outsourcing and consulting company Accenture Plc (ACN.N: ) reported a fall in quarterly earnings and cut its outlook for the year, citing a stronger dollar.

PRESSURE ON MARGINS

A firming rupee on the back of rising foreign investment in India’s fast growing economy is seen hitting outsourcers, who earn the majority of their revenue in dollars while most of their spending is in rupees.

The rupee rose 3.6 percent against the dollar in Jan-March, after gaining 4.7 percent in 2009.

Infosys is offering salary hikes of 13-17 percent for its offshore staff and 2-3 percent to onsite employees, which would put further pressure on margins.

“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, said after the results.

“This pressure is not likely to go away as the rupee is still appreciating,” he said, adding he was “underweight” on the sector and would not buy Infosys stock at this point.

Infosys Chief Operating Officer S.D. Shibulal told reporters the firm expected 2010/11 profit margins to drop 150 basis points mainly due to the firming rupee, while B.G. Srinivas, senior vice president at the company told the Reuters Trading India Internet chat room the impact of wage hike had also been factored in.

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

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(Additional reporting by Kaustubh Kulkarni, Ami Shah and Aniruddha basu; Writing by Devidutta Tripathy; Editing by Ranjit Gangadharan and Anshuman Daga)

Infosys bets on technology spend; flags currency risk