MARKET EYES INFOSYS RESULTS FOR CUES

PP Thimmaya, Bangalore
The Economic Times

Investors are praying Infosys Technologies won’t display signs it expects offshoring demand to weaken, as the company prepares to disclose its third quarter earnings on Friday, analysts and experts said.

The overall negative sentiment on the IT sector is likely to continue despite a good performance from the company, but market players will be lip-reading its officials for clues on IT spending by US companies and the unfolding impact of the subprime mortgage crisis, they said.

For years, Infosys has been the unofficial harbinger of the earnings season, but in 2008 has seen it take backstage, as the combined thump from a firm rupee, fears of slowdown in the US, higher wages and thinning margins has reduced the sector’s stock market appeal.

Average estimates of seven brokerages showed Infosys is expected to increase revenues sequentially by 5.7 percent, the slowest among its peers. Infosys is seen increasing profits by 7 percent compared to the July-September quarter. But the quarterly growth itself is less of a concern compared with the landmines Indian IT companies may step on in the coming months. “We do not expect any surprises in Q3 results,” Gaurav Dua, a Sharekhan analyst said.

“But the key factors to watch out for will be their commentary on demand environment and operations parameters like employee addition and growth in revenues from banking and financial services vertical,” he said.

The third quarter is usually a weak period for the industry given the holiday season and customers being in the planning mode. That overall IT spending will shrink has become a consensus and the only question is whether the cost saving will actually force troubled companies to move more work offshore.

“Offshoring is one of the most effective saving levers; thus economic challenges might even speed up the adoption of offshoring,” research houses Bernstein and Everest said.

A clearer picture is likely to emerge only later this month, days after Infosys’ results, when US corporates start renegotiating deals or announce new contracts. Typically, investors will track trends on discretionary spending on technology, beyond the normal budgetary allocation. Lack of such investments will suggest firms are putting new plans on hold and spending only on routine software work.

The staple for the IT services industry is the application development and maintenance (ADM) business. Infosys derives half its revenue from this segment that involves code writing and housekeeping for computer networks. Bernstein and Everest said “cost cutting in ADM is likely to have significant overall negative impact on the sourced ADM services as most of the cost improvements in ADM come from limiting demand for ADM.”

A growing trend for 2008, equity researchers said, would be a steady shift from traditional hourly billing for software services to outcome-based pricing. This will call for an internal change in the business model, because the new format calls for a different set of cost management techniques, analysts said.

A key aspect of business confidence is hiring and especially so in IT, since companies must hire well in advance for future projects. Infosys’ hiring in the second quarter, with a net addition of 4,530 people, was a disappointment.

“Infosys had postponed its recruitment in the September quarter due to delay in infrastructure commissioning. This may see a jump in new joinees in the December quarter,” Kotak Securities mentioned in its report.