By Audrey B.
Expectations were high for the end of quarter results of India’s number two outsourcer, Infosys (NASDAQ:INFY). As the first of its peers to release quarterly results (see earnings call transcript here), the outsourcing company is responsible for setting the tone for India’s outsourcing sector. It was therefore a big disappointment when Infosys announced a 2.6% drop in profit for the period of April to June 2010.
Prior to the release, forecasts were positive and the market was optimistic about the company’s results. According to a Reuters (NYSE:TRI) poll of brokerages, the company’s profit was expected to be at around 15.56 billion rupees or $330 million, while a report by Edelweiss Securities, estimated that the company will be, “surpassing its revenue guidance of a 2.6-3.4% growth, quarter-on-quarter (QoQ), with ease.”
On the 13th of July, however, the release of Infosys’ quarter results turned out to be a disappointing event, as the company posted a 2.6% drop in profit to 14.9 billion rupees or $318 million. The company’s CEO, S. Gopalakrishnan however, was quoted saying that,"while the global economic environment remains uncertain, we continue to see greater demand for services from our clients.” A number of economic and operational difficulties however, have affected the company’s performance, bringing its results down to less than stellar.
Infosys CEO Gopalakrishnan has said that they are seeing “greater demand for services from our clients.” The supply of quality talent, however, continues to dwindle, with the continued economic recovery and increasing competition.
Just a few days ago, on the 16th of June, outsourcing firms including Tata Consultancy Services [NSE:TCS], Wipro (NYSE:WIT), Cognizant (NASDAQ:CTSH) and Infosys, all lodged a complaint against fellow outsourcer Accenture (NYSE:ACN), due to violation of campus recruitment norms in India. Indian outsourcing companies often recruit employees out of campuses in India as a recruitment strategy. The companies begin placement by the final semester of the school year in accordance with Nasscom. Accenture, however, has been accused of sending placements out a semester ahead of its competitors, earning the ire of fellow outsourcing companies including Infosys.
Aside from that, the company has also implemented a new program called Green Channel, in an effort to hire back ex-employees of the company, thereby reducing time spent on training new employees. Infosys last year is reported to have hired 20,000-22,000 people who were from non-computer science backgrounds. For the last quarter, the company hired only 1,026 staff, which is comparably the slowest pace of hiring in the last four quarters.
It is not only hiring that has affected Infosys’ margins; efforts to cut back on attrition within the company have led to increased wages among employees."Companies have given an average wage hike of 12-14 percent offshore and 2-3 percent onsite to be competitive in an improving demand scenario," according to an analyst with a Mumbai-based brokerage.
This has however, contributed to the company falling short in its numbers. The company’s attrition rate has shot up to 15.8% as compared to 11.1% one year ago and 13.4% last quarter. There were a total of 7,833 employees who quit the company.
According to company Board Member T.V. Mohandas Pai, “with the market opening up, attrition has increased this quarter. We have taken several steps, including a compensation hike to reduce it.” He further adds that, “one of the steps we are taking to reduce attrition is to enhance lateral hiring.”
“Profitability was also hurt by currency volatility, a 30.4% higher tax charge and lower billing rates”, said Chief Financial Officer V. Balakrishnan. A stronger rupee and the 1.6% fall in billing rates have affected the company’s operating margins. Based on currency, the dollar rose 8% against the euro and 5% against the pound, mainly due to the European debt crisis, affecting the dollar revenues of the company.
Currently the company’s second largest market after the US, Europe’s debt crisis has affected the outlook for demand and the company’s margins. Company COO S.D. Shibulal has said in a statement with Reuters that, with Europe, “there are still concerns, local concerns as well as tail effects of the previous recession. Of course, Europe entered the recession late and we believe it will also come out late."We believe that Europe will lag behind the U.S. for may be another quarter or two.
With the release of the Infosys’ quarter results; it would seem at this point that India’s number two exporter is lagging behind its current rivals. Judging from the results released by fellow Indian outsourcer Tata Consultancy Services, Infosys will need to play catch up for the next quarter.
Disclosure: No position