As Infosys gets ready to deliver the Q1 FY10 results, it could perhaps not have imagined a more challenging time in its history. It will also be the first day that Infosys will function without former CEO Nandan Nilekani being around.
Growth is expected to be flat at best, revenues have been under pressure and the days with hefty 30 per cent plus margins are a huge challenge to match. Dollar revenues are not yet looking up. Surprising the market, which Infosys has been consistently able to do over the years, seems an increasingly difficult task to achieve.
The rupee has appreciated over 5 per cent against the dollar against the rate assumed by Infosys when it gave its guidance during April. So, for every dollar that Infosys earned during the quarter, it will earn nearly 5 per cent less in rupee terms, hitting margins adversely.
While there has been the occasional comment that demand is picking up, it is still far from business as usual. However, Infosys did go ahead with hiring about 3000 people during the first quarter. But since utilisation is expected to fall, the market is expecting that the IT giant will report weaker margins.
With the rupee expected to appreciate from current levels, any cut in the earning per share (EPS) guidance for the year will see a minor sell off in the stock. A downward revision in the full year profit after tax (PAT) number can make the stock lose 5 per cent or more immediately as trade opens. The market is expecting a fall in revenues and profit, and the margins are expected to be slashed too. So, that will not have too much of an impact on the stock.
Luckily the challenging environment has had the cushion of government support. The government has extended the tax breaks under the Software Technology Parks of India (STPI) scheme for IT companies. The tax break, which was to have expired in March 2010 has now been extended by a year. Analysts say that the hike in Minimum Alternate Tax (MAT) from 10 per cent to 15 per cent will have almost no impact for companies.
Traditionally, Q2 is the strongest quarter for IT companies. The new hires generally join the company and billing starts for them. But don't expect bold announcements from the company since
NDTV Profit is expecting PAT at Rs 1365 crore against Rs 1613 crore that it earned during the first quarter. That is a drop of over 15 per cent sequentially. Revenue is also expected to register a 5 per cent fall to Rs 5330 crore, according to NDTV Profit estimates, against Rs 5635 crore during the last quarter. Earnings before interest, tax, depreciation and amortisation (EBITDA), which shows how profitable a business is, could go down by over 300 basis points to 30.4 per cent, NDTV Profit estimates suggest.
Infosys has had a history of outperforming its guidance at the upper band by at least 2 per cent and that has consistently been happening for the last 16 quarters. This time, given the strong headwinds that have not yet died down, it may not be easy.
Anything that the management says about demand picking up for the latter half of the year will be greeted by the market.