Infosys Results & Guidance indicate tough road ahead

Infosys has declared the Q4 Results.

Q4 FY09 net profit dipped 1.7% at Rs 1,613 crore as against Rs 1,641 crore on quarter-on-quarter basis.
Revenue declined by 2.61% at Rs 5,635 crore as against Rs 5,786 crore QoQ.
Consolidated net sales for FY09 at Rs 21,693 crore versus Rs 16,692 crore (a jump of 30%) and increase of 28.5% in Consolidated net profit at Rs 5,988 crore versus Rs 4,659 crore.
Infosys has recommended a final dividend of Rs 13.5/share.
Top client revenues for the quarter ended March 2009 declined by 12.06% QoQ
Top 10 client revenues declined by 5.75% QoQ

These are highlights of Q4 Results. Now lets look at how the future appears to the Infosys management

Q1 Revenue forecast at Rs. 5,379-5,480 crore.
Q1 EPS seen at Rs. 23.55
FY10 revenues to decline by 3.1-6.7% in dollar terms while increase in revenues by 1.7-5.7% in rupee terms
EPS for full year FY10 at Rs 96.65-101.18 a share versus Rs 104.43 in FY09

What does Infosys result indicates?

Slowdown in Revenue Growth Evident

A drop in Revenues for the company which had made it a habit to surprise investors with superior financials is a clear indicator of things to come. Further the guidance for Q1 FY10 and Full year predicts a challenging environment both in terms of pricing as well as new business. Top 10 client revenues saw a sharp decline which means that there will be tremendous pressure on billing rates in the days to come.

Infosys results are a clear indicator of drastic cut by companies on their IT spend. Obviously, when things are in pretty bad shape due to ongoing recessionary trends, companies would tend to cut down on their IT investments to maintain their bottom lines. Similar and more downtrend would be visible in the revenues of other IT companies.

Cost Optimization would be crucial

In a scenario where a company is not able to grow its revenues, it becomes imperative to cut down on the operating costs to generate profits. This would be visible not only in the IT companies, but across the sectors as the pressure to preserve margin mounts. As a result, we would see major Headcount reductions being announced by companies more particularly in IT sector as headcount is a major cost factor.

Is Revenue segmentation a Indicator ?

If we see change in Revenue Segment by Industry, it gives at least an indication of the broad environment of that industry. The sharpest drop in Infosys Revenue came from Financial Services and Manufacturing Industry Clients. This indicates that these industry are facing serious challenges and hence cutting on their IT spend. The Revenues from Telecom sector has increased conforming that this industry has not been impacted in a major way by the ongoing slowdown.

As the results season starts, we would need to see how Indian companies performed in the Q4. There are no high expectation this time around and if a company reports QoQ growth that would be a good indication of companies performance. I personally feel that Infosys results and guidance are reasonably good considering the severe drop in consumption and negative sentiments globally. The companies stock at Rs. 1400 looks reasonably priced and don’t see much movement on either side due to the results.