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Infosys Slumps on Outlook for Sales, Profit Margins

Kris Gopalakrishnan, co-chairman of Infosys Ltd.. Photographer: Adeel Halim/Bloomberg
Kris Gopalakrishnan, co-chairman of Infosys Ltd.. Photographer: Adeel Halim/Bloomberg

Oct. 12 (Bloomberg) -- Infosys Ltd. fell the most in three months in Mumbai trading as India’s second-largest software services exporter cut its sales-growth forecast and said higher wages and currency fluctuations will hurt profitability.

The shares declined 5.4 percent to 2,395.35 rupees at the close, the biggest drop since July 12. Bangalore-based Infosys cut its forecast for this fiscal year’s revenue to 395.8 billion rupees ($7.5 billion) from a July estimate of 403.6 billion rupees.

Chief Financial Officer V. Balakrishnan today said operating profit margin will decline by 2 percentage points because of wage increases and fluctuations in the rupee, while Chief Executive Officer S.D. Shibulal said the business environment continues to be “challenging.” Researcher Gartner Inc. has forecast that global information technology spending would grow at a slower pace this year.

“The guidance is a disappointment -- it shows that there is some problem with Infosys’s core business,” said Ankita Somani, an analyst at Angel Broking Ltd. in Mumbai. “It tells us that business is under significant pressure.”

The company had an operating profit margin of 26.3 percent in the three months ended September, Balakrishnan said in Bangalore. That compares with 28.2 percent in the year earlier period, according to data compiled by Bloomberg.

Infosys, whose clients include BP Plc and Volkswagen AG, has slid 13 percent this year, compared with a 21 percent gain for the BSE India Sensitive Index, or Sensex.

Quarterly Profit

Net income rose 24 percent to 23.7 billion rupees in the three months ended September, Infosys reported today. That compares with the 23.8 billion-rupee median of 41 analysts’ estimates compiled by Bloomberg. The outsourcer kept its forecast for this year’s revenue in dollar terms of at least $7.34 billion.

The company on Sept. 10 said it had agreed to buy Swiss management consulting company Lodestone Holding AG for 330 million Swiss francs ($353 million), adding more than 750 consultants and 200 customers in industries including manufacturing, automotive and life sciences.

Infosys hasn’t included revenue from Lodestone in its forecast for annual sales as the transaction has yet to be completed, Balakrishnan said. The company expects to include revenue from Lodestone in its next forecast in January, he said.

‘Challenging’ Environment

Revenue rose 22 percent to 98.58 billion rupees, the company said. That compares with the 99.3 billion-rupee median of 43 analysts’ estimates.

“The environment has not changed at all, it is still as challenging as before,” said Shibulal.

“The U.S. environment is challenging,” the CEO said. “Europe continues to be in turmoil and that makes our clients less confident, their ability to take decisions is lower.”

The Indian rupee was Asia’s best-performing currency against the dollar in the three months ended September, with a 5.3 percent appreciation in the period.

Infosys, which derived 65.1 percent of its revenue from companies in North America and 21.2 percent from Europe last year, draws most of its revenue in dollars and euros from clients based in U.S. and Europe. A stronger rupee hurts Infosys by reducing the value of repatriated earnings.

Every 1 percent movement in the Indian rupee against the U.S. dollar affects operating profit margin by about 0.5 percentage point, the company said in its annual report.

Infosys, which designs and builds software programs, maintains computers and provides IT and outsourcing services for customers such as GlaxoSmithKline Plc and ING Belgium, added 39 clients during the quarter, ending with a total of 715.

To contact the reporters on this story: Suresh Seshadri in Bangalore at sseshadri1@bloomberg.net; Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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