Infosys manages slight first-quarter profit increase, labor costs cloud outlook

[July 14, 2017]  By Arnab Paul and Sankalp Phartiyal

BENGALURU/
MUMBAI (Reuters) - Infosys Ltd, India's No. 2 software services exporter, eked out a slight rise in first-quarter profit, although the outlook for more earnings gains remains cloudy due to higher labor costs and unfavorable currency rates.

India's more than $150 billion software services sector faces headwinds in its biggest market, the United States, as clients hold back technology spending amid concerns about President Donald Trump's review of a visa program for highly-skilled workers.

Net profit rose 1.4 percent to 34.8 billion rupees ($540 million) in the April-June quarter from a year earlier, just a tad above expectations.

Infosys retained its annual revenue outlook at between 6.5 percent and 8.5 percent growth on a constant currency basis.

But Mumbai brokerage Emkay said in a client note that the company's failure to lift its revenue guidance indicated first-quarter pricing gains were not sustainable and profitability could see a "downtick" in the coming quarter on lower growth, wage hikes and rupee appreciation.

After Trump targeted outsourcing firms, Infosys said in May it plans to hire 10,000 U.S. workers in the next two years - a move that will likely lead to higher labor costs. It is also due to give annual salary increases to employees this month.

"We'll be announcing the compensation hikes and we are also ramping up the U.S. talent model," Finance Chief M.D. Ranganath told reporters.

The Indian rupee has also risen 5.4 percent against the U.S. dollar this year, adding to the woes of outsourcers who bill for the majority of their services in foreign currencies.
 

An employee walks past a signage board in the Infosys campus at the Electronics City IT district in Bangalore, February 28, 2012. REUTERS/Vivek Prakash/File Photo

But Infosys fared better than bigger rival Tata Consultancy Services which missed analysts' expectations on Thursday with a 6 percent drop in first-quarter profit.

Shares in Infosys, valued at about $35 billion, ended 0.5 percent lower.

Infosys has had a rocky year with some founders and former executives of the company publicly accusing its board of governance lapses and urging it to reward shareholders through a share buyback.

The company plans to return about $2 billion to shareholders this financial year, but has yet to detail the manner of the payout. At end-June, Infosys had a record $6.1 billion cash balance, Ranganath said.

IT outsourcing firms are also facing pressure as traditional businesses such as routine infrastructure maintenance are seeing their margins squeezed as clients demand more work for less money, pushing the sector to develop cloud, data analytics and cyber security services.

Infosys lost one client in its $100 million category during the quarter from the previous quarter, but total active clients rose by a net of 2 to 1,164.

(Reporting by Arnab Paul and Sankalp Phartiyal; Additional reporting by Swati Bhat; Writing by Devidutta Tripathy; Editing by Stephen Coates and Edwina Gibbs)

[© 2017 Thomson Reuters. All rights reserved.]

Copyright 2017 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.