Is the worst behind Infosys?

The Indian IT services giant beats analyst expectations after a long time. It posts flat third quarter net profit, while raising its revenue forecast for the current financial year, ending Mar. 31.
Written by Swati Prasad, Contributor

Infosys, India’s second-largest software services provider, on Friday raised its revenue forecast after posting stronger-than-expected quarterly profit.

In October-December 2012, the company’s revenue rose 12 percent to US$1.9 billion (INR 104.24 billion) from US$1.7 billion (INR 93 billion) a year earlier. The firm added 53 clients during the quarter, the strongest pace of additions in a long time.

Infosys raised its sales forecast for the year ending March 31, 2013 to at least US$7.45 billion, including US$104 million in additional revenue following its acquisition of Switzerland-based consultancy Lodestone Holdings.

What helped Infosys boost its revenue are new deals--including 13 in Europe. Moreover, spending on IT services by capital markets clients such as investment banks and brokerages has also improved. Clients that have signed big contracts with Infosys, including Harley-Davidson, also accelerated spending during the quarter.

"We continue to gain confidence from a strong pipeline of large deals," Shibulal said in a statement on Friday. "We remain cautiously optimistic about the January-March quarter."

"We were able to maintain our margins through efficiency improvements despite increased operating expenses. We remain focused on making the right investments for profitable and sustainable growth in the longer term", Rajiv Bansal, chief financial officer of the company, said.

Infosys used to be a favorite of investors for a number of years as it always exceeded its targets. But for the last 18 to 24 months, the company has been underperforming the industry.

There were several reasons behind its underperformance.

First, Infosys is going through a restructuring exercise--changing strategy from Infosys 2.0 to Infosys 3.0.

Second, the company may have still been coming to terms with the change in leadership with the co-founder Narayana Murthy stepping down as chairman in 2011, and co-founder Nandan Nilekani leaving in 2009 to take on a bigger role as the chairman of the Unique Identification Authority of India.

Third, the company is hugely dependent on the U.S. economy, which contributes 60 percent of its revenues. So the slowdown in the U.S. had a huge negative impact on the company. Infosys is also particularly exposed to discretionary spending in the financial sector. Besides, its premium pricing has also put off some customers.

Last year, several top executives of the company exited Infosys--including COO of Infosys BPO, Ritesh Idnani, raising an alarm in the Indian IT industry.

The results, therefore, have clearly surprised many analysts. While some analysts said it is still too early to predict a recovery for the company, others like Partha Iyengar, country manager, research, Gartner India, feel that the worst phase for the company may be behind it.

“Infosys results are finally coming closer to reflecting the demand reality, and if this sustains for the next two quarters, it could indicate that the worst phase of the company is behind it and it can stand to benefit from the strengthening demand environment,” Iyengar told ZDNet in an email.

According to Iyengar, the upping of full year guidance is also a good sign for the company which shows some semblance of a return to confidence for the company, “which was quickly becoming a ‘negative outlier’ amongst the Indian services majors.”

"The market was slightly predatory, given that the last two times the company has disappointed, but this time the organic guidance is better... which I think will be taken positively," Rikesh Parikh, vice president for markets strategy and equities at Motilal Oswal Securities said in a news report.

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