Infosys results signal coming IT boom

It feels like 2004 all over again. The Infosys results point to a major upcycle in outsourcing, driving profits up to levels not imagined till recently.

That was the verdict from Bhavtosh Vajpayee and Nimish Joshi, analysts with CLSA Asia-Pacific Markets, after India’s No 2 software company declared its December quarter numbers on Monday.

Net profit rose 2.7% to Rs 1,580 crore over the July-September quarter, which is at least Rs 100 crore more than what analysts had predicted.

To top it, the company said it is raising its sales guidance for the year ending March 31, 2010 by 2% to $4.76 billion (Rs 21,763 crore) — reversing an earlier prediction of a 1.3% drop — because of global economic recovery, which is expected to generate greater orders for software and services.

The company, however, warned a rising rupee can impact its profits because it will get less for the dollars it earns abroad.
Software shares gained after the Infosys results.

“After six years, we have seen a December quarter this strong. With a lot of business billed hourly/daily and more holidays, the December quarter (usually) mean a weak seasonal pattern. Not so this time,” Vajpayee and Joshi exulted.

The duo view outsourcing as “binary trend”, which indicates extreme troughs and highs.

“When decision making stops among customers, it is a deep freeze. The Indian cost-saving proposition loses relevance amid restructurings, bankruptcies, mergers and management changes among customers. (but) when outsourcing rains, it pours,” they said.

The two are now expecting surge in outsourcing, which will drive multi-quarter earnings upgrade cycle. 

“It will be hard(er) to model the extent of growth possible, and Infosys’ latest quarterly report shows just why,” they write in their concise report.

Kris Gopalakrishnan, chief executive officer (CEO) of Infosys Technologies, said the worst was behind for Infosys and the IT sector in general.

“When we discuss with our customers, they are confident about their business and that (confidence) is reflected in their decision making. They are now committing to larger projects. In this quarter, we won a large project worth $200 million,” he said.

Gopalakrishnan believes post-recession customers’ focus on cost will see a flood of outsourcing deals, which will benefit offshoring companies. “2010 will be a better year then 2009,” he said.

Manoj Singla, Nishit Jasani and Gourav Vijayvergiya, analysts with investment bank JP Morgan, expect the pace of growth of the IT sector to beat the expectations of industry and markets.

“The Infosys results highlight the continued recovery in the IT spending environment with the pace of growth being higher than expectations,” they said in a report after the results on Tuesday.
Global corporations are being forced to cut costs due to the ongoing recession by outsourcing work to companies like Infosys.  

“Indian vendors have to thank the downturn for the next step up in their share of the $800 billion global IT services pie. The offshore proportion is rising for most services. The sector has not broken free of challenges yet but we believe opportunities will overwhelm risks in the next two years,” Vajpayee and Joshi said.

However, Ganesh Natarajan, global CEO of Zensar Technologies and former chief of Nasscom, says the increase in outsourcing will not be an ‘explosion’, but will be ‘gradual’.

“We will see the 2007 kind of growth (15%-18% annually) only in 2011-12. In this fiscal, we will see earnings grow 10%-12%, which will be higher than the 5%-7% we have forecast for the current fiscal,” Natarajan said.