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Saturday, 12 October 2013 00:00
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Indian rupee’s fall and Murthy junking Infy 3.0 pays off, for now

After several quarters of disappointing investors, it must be heartening to see erstwhile IT bellwether stock Infosys doing so well—the stock has risen post-results in just 3 of the last 8 quarters. The company that posted a 3.8% hike in sequential revenues in dollar terms in the September quarter, and 15.1% in rupee terms, saw its stock prices rise 7.6% intra-day though it finally closed 4.8% higher to a level last seen in April 2011. It, however, remains to be seen if NR Narayana Murthy’s return will help narrow the difference between TCS and Infosys, that gap has widened dramatically with each passing quarter—the TCS/Infy sales ratio rose to 1.6 times in June 2013 from 1.44 in September 2011; in the case of Ebitda, this rose to 1.93 from 1.48 times; and in terms of market capitalisation, while TCS was 2.08 times Infosys in June 2013, this was just 1.4 in September 2011. The main reason for Infy doing well in the September quarter was Murthy deciding to downplay Infosys 3.0, the attempt to upscale the business through high-margin proprietary software and consulting, and deciding to go back to the more vanilla application development and maintenance—from 24% a year ago, as a result, net profit margins were slashed to 21% in the June quarter and a dramatically lower 18.5% in the September quarter. Not surprisingly, dollar earnings per share are down 8% over the quarter and nearly 11% over the year. But the dramatic 3.8% qoq rise in revenues shows Murthy has got the equation right. For now, management focus is on raising revenues and increasing efficiency.

A big reason for Infosys’s revival, of course, was the recovery of the US market and the collapse in the value of the rupee—it has been 5-6 quarters since the industry last saw the kind of revenue growth Infosys clocked in rupee terms in September. But since the rupee’s plunge against the dollar has halted, and the US economy is looking decidedly shakier with the shutdown, while Infosys has raised its guidance, it has done so only for the bottom end of the range—from the 6-10% last quarter, it has been raised to 9-10%. What’s heartening is the sustained hike in the number of new clients being added—from 413 a year ago, the number of $1 million-plus clients rose to 469 in the September quarter while the $100 million-plus ones rose from 11 to 15. On a sequential basis, however, the change is barely discernible, reinforcing the view that it will take a lot more than Murthy’s return to get Infosys back on track. The return of global IT spending, however, augurs well for other IT firms as well, which is why their stocks rose after the Infy results—in the case of TCS which has consistently out-performed Infosys, the shares went to a life-time high. For India’s balance of payments, the services sector recovery that began in the June quarter is all set to get stronger.


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