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Infosys Q2 2007 Results: Bad?


Infy’s Q2 results were out on Thursday, when they were battered by the markets – down around Rs. 200, or 8% in the last two days of last week.

But were the results bad? Let’s see.

  • Year on Year, Revenues are up about 19%, and net profit is up 18%. EPS is around 18%. This is much lower than typically expected – they grow about 25% usually. The Rupee is up 1.2% against the dollar, and which means the rupee probably impacted the margins quite a bit.
  • EPS Guidance is at around Rs. 80 for the whole year. This is about 14% higher than last year. The current market price of Rs. 1950 seems too much for a company growing at 16% annually. A more reasonable P/E would be 20, which brings us a short-term price of 1600. That’s probably where fair value would lie.
  • 8500 people joined Infy instead of 11000 (some problems with the facility in Mysore, which has delayed things by a quarter). Net hires: 4530. That means around 4000 people left – a net attrition of 50% of new hires! My last post shows that this trend continues from last year.
  • Now consider that 50% of new employees hired leave, and they’ve upped the guidance on gross hiring to 30,000. That means 15,000 net hires, which, on their 72,000 employees on March 31,2007, is only 20% growth. They could of course increase other levers like utilization, billing rates and productivity but on such a huge base I doubt this will have more than 1-2% net impact after considering the rupee effect and wage increases.
  • Forex hedges are (hold your breath) $1.4 billion. This is downright ridiculous. They get hit two quarters in a row by a hugely rising rupee, and then they hedge for 125 days? They make a billion dollars a quarter. They are going to make 1.4 billion by Feb 2008. So that’s it? If the dollar is below today’s rate in Feb 2008, they will hit more rupee issues? I don’t know what the big deal is, why don’t they simply take a year hedge and leave it? Unwind the darn thing if it goes to, say, 42. Otherwise atleast you don’t have to pull levers like productivity which as a software person, I can tell you, is difficult for a company like Infy.

    Since their numbers indicate an exchange rate of Rs. 39.5 to a dollar, I believe we can assume their hedges are at that rate. If they had hedged three billion dollars in the last quarter at 40.5, profits this quarter would have been much better by 120 cr, 10% higher than they delivered.

  • Not much exposure in subprime mortgages- 0.5% to be precise. There is some exposure to credit card customers, and to others in the financial service business, but they don’t want to quantify it. They’re not losing customers or income (yet) from these customers.
  • They will acquire (what else can they do with some 7500 cr. in cash?) but I would rather leave that till it happens. Till then we can assume about 500 cr. a year as interest income!

Overall, the results were pretty much in line with expectations, marginally beating their guidance. I guess the run up of the stock from the 1800 levels to 2150 on the day before the results was purely speculation that there would be fireworks.

Given that this stock would probably demand a 30 P/E in the US, as its growth there in dollar terms is about 30%, and the Indian listed entity would demand a lower P/E things are going to be difficult to measure. After all, there’s value to a US investor if the Indian stock goes down. So perhaps the rate of 1900+ will continue for a while, and if the rupee stays at this level, will start coming down as the days go by.

Stay out of everything that is IT for the short term, unless you’re a trader. Disclosure: I hold only IGate, and that’s to make some gains on their buyback pricing. No other IT holding, though I did trade Niit Technologies last week.


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