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Infosys springs twin surprises

Mumbai, Jan. 11: Software major Infosys today pulled a rabbit out of a hat when it not only posted better-than-expected profits for the third quarter ended December 31 but also raised the revenue forecast for the entire year, sending its shares soaring almost 17 per cent.

The Bangalore-based IT services giant, which has been disappointing investors in the past eight quarters, bucked the trend by reporting a net profit of Rs 2,369 crore in the third quarter ended December, marginally lower than the Rs 2,372 crore in the corresponding period of last year.

However, the third-quarter net profits were way ahead of analyst estimates of roughly Rs 2,200 crore.

On the back of such a robust performance, Infosys raised the sales forecast for the current fiscal to $7.45 billion. This translated into a rise of 6.6 per cent over the previous year and far higher than the earlier forecast of 5 per cent for the year.

Infosys, which posted a 12 per cent growth in revenues at Rs 10,424 crore, also raised the earnings per share (EPS) guidance by 1.4 per cent for the year to at least Rs 162.80.

The stock markets reacted with gusto to Infosys results and its guidance. The stock leapt to Rs 2,712.60 at the close on the Bombay Stock Exchange.

On the National Stock Exchange, the scrip ended 17.04 per cent higher at Rs 2,718.

The 17 per cent surge in the stock saw shareholder wealth swell Rs 22,500 crore (or $4 billion) to Rs 1,55,767 crore.

Expectations were muted ahead of the Infosys numbers as the third quarter is seasonally a weak period for IT companies. Moreover, there were work disruptions in the US because of Hurricane Sandy last October.

Senior officials of the company had recently indicated that there had been delays in decision making, which had sparked apprehensions that the company might tone down the organic (excluding Lodestone acquisition) sales growth guidance for the year to around 3.5 per cent.

The better-than-expected performance from Infosys on the bottomline front came on account of multiple factors.

The company added 89 clients during the period, up from 39 in the second quarter and 49 in the same period of last year.

While the company also won eight large outsourcing deals amounting to $731 million of the total contract value, the quarter also witnessed growth in each of the industry verticals and geographies.

Another positive element was that despite giving offshore wage hikes, the company’s margin declined only 68 basis points on a sequential basis to 25.7 per cent against an expected decline of 100 basis points.

Moreover, pricing during the period rose 1.8 per cent.

“We have done well in this quarter despite an uncertain environment,” said S.D. Shibulal, chief executive officer and managing director.

He added that the company continued to gain confidence from a strong pipeline of large deals though the broader economic environment remained difficult.

The super performance from Infosys has now led many in the Street to believe that the company’s strategy of focusing on the high margin consulting segment has begun to pay off and that the third quarter could be the start of a turnaround.

Infosys’s disappointing performance in the past had also hampered its stock market performance with Tata Consultancy Services (TCS) now being considered as the bellwether. However, experts are of the belief that Infosys would now regain some of its glitter.

“Infosys has been under-performing for the past few quarters vis--vis other large-cap IT peers because of various reasons. The valuation gap between Infosys and TCS had widened to a very large 24 per cent during the same period. This gap is likely to shrink in the wake of the company staging a comeback in the third quarter,” said Vinay Khattar, head research (individual clients), Edelweiss Financial Services Limited

Angel Broking research associate Ankita Somani said there seemed to be a case for a re-rating based on the current results.

She, however, added much would depend on how client budgets pan out over the next year and Infosys’s share in the area of deal renewals.

 
 
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