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Why Infy results spooked the market

Infosys said on Thursday that it does not expect any growth in the pricing of contracts going forward.

Source: AP
Source: AP

Infosys is a barometer for the technology services industry. On Thursday, the company announced a strong set of numbers for the third quarter ending December 2011. Its revenue rose by close to 15 per cent over the September 2011 quarter and the net profit rose by 24.4 per cent during the same period.

Yet, the share price plunged by 7 per cent. Here are some reasons that could help you demystify the event:

* Today’s share price is based on the future profit growth. Infosys sells technology services to customers around the world and earns revenue in the foreign exchange. The company said on Thursday that the revenue growth in US dollar terms for the quarter ending March 2012 is likely to be flat. This was earlier said to be 3 per cent to 5.4 per cent. Investors track the guidance that the company gives on the growth outlook closely. They were disappointed with the announcement and that was reflected in the sharp fall in the share price.

* S D Shibulal, MD and CEO at Infosys said that the company gives the guidance based on expectations and statistics they possess at the time of the announcement. The guidance for March 2012 indicates that the current business environment is tough. He said that CEOs of large corporations (that give business to Infosys) see uncertainty ahead and are not willing to spend money on services like enterprise resource planning, a flagship service of the company. This is also reflected in the enterprise resource planning (ERP) implementation revenue segment of the company. The overall contribution of this segment to the revenue fell in the December 2011 quarter. The ERP segment accounts for over a third of the company’s over Rs 9,000 crore quarterly revenue. That is bad news not only for Infosys but for all other companies like TCS, Wipro and Mahindra Satyam among others.

* Infosys gets 63 per cent of the total $ 2bn revenue each quarter from US. The company saw just 1 per cent revenue growth in that region. Although the US economy is showing signs of an improvement, it will take time before US companies begin spending on IT services. Slow US business growth would continue to hurt revenue growth at Infosys even as the company makes an effort to push revenue from Europe.

* Infosys said on Thursday that it does not expect any growth in the pricing of contracts going forward. This is the worth of each contract it signs as a vendor with customers. The company got about 5 per cent hike over the past one year when it signed up new customers or renewed contracts. However, the outlook is of a flat pricing scenario going forward. This means the company will have to renew contracts or take on new contracts at current prices. This affects the overall revenue and profitability of the business.

* Infosys is sitting on more cash than the business needs. The company announced that it has cash balance of close to Rs 20,000 crore. Companies on a high growth path do not hoard too much cash as they either deploy it back into the business or return it to shareholders as dividend. The company has often cited high business growth as the reason for not returning cash to shareholders. It has succeeded in delivering superior growth for years. However, with signs of slowdown in revenue and profitability, investors cannot see any significant utility for the high cash hoard. Infosys is also conservative and cautious when it comes growth through mergers and acquisitions.