Infosys' Weak Outlook: Appreciating Rupee, Rising Wages To Blame

| About: Infosys Limited, (INFY)

Infosys (NASDAQ:INFY) profit rose 34.5% but its full-year outlook was cut due to a rising rupee, according to MarketWatch:

Net profit for India’s second-largest software exporter rose to 10.79 billion rupees ($268.8 million) in the quarter ended June 30, from 8 billion rupees a year earlier. Earnings per share for the quarter rose 31.5% to 18.89 rupees (47 cents).

Infosys said it was reducing its earnings-per-share forecast for the full year, in accordance with Indian accounting standards, to at least 78.20 rupees from its April forecast of at least 80.29 rupees. It made the revision because of a sharp appreciation of the Indian currency against the U.S. dollar.

In dollar terms, the company’s revenue of $928 million and earnings per share of $0.46 were better than the analyst estimates of $909 million and $0.40. However, full-year guidance of $4.0 - $4.05 billion in revenue and $1.92-$1.94 in earnings per share are disappointing. Analysts were expecting $4.07 billion in revenue already, and even though the official estimates were for $1.84 in EPS, $0.06 of upside was provided in the past quarter, and investors were surely hoping for more than another $0.02 for the remainder of the year.

When I previewed earnings for this week, I said:

The $0.40 consensus estimate factors in slowing growth, but the degree of earnings surprise has been narrowing in recent quarters. Given my own experience with outsourcing recently and the general employee retention issues, I think we’ll see some disappointments in this sector over the next couple of quarters.

So far, the company is blaming the crunch not on the tight job market but on the rising rupee. Other factors were not written off entirely:

“The sharp appreciation of the rupee against all major currencies impacted our operating margins during the quarter,” said V. Balakrishnan, Chief Financial Officer. “However, our robust and flexible operating and financial model enabled us to maintain our net margins while absorbing the impact of appreciating currency, higher wages and visa costs.

These are all pressures on an employee-centric enterprise founded on the major wage discrepancies between their home country and those of their customers. If wages and the home currency both rise by 10% annually (in many cases it is even faster) relative to customers, it doesn’t take long for that disparity to reverse. And it takes even less time for the disparity to narrow sufficiently to stall out a 30% growth rate.

INFY 1-yr chart:

INFY 1-yr chart