The Hindu Business Line : Infosys guidance on a conservative note once again

INFOSYS Technologies has once again struck a conservative note on the revenue and earnings guidance for FY 2005-06. This guidance has to be seen in the context of two factors:

One, under Indian GAAP, the guidance is marginally higher than that for 2004-05. For 2005-06, the company has projected a revenue growth of 26 per cent compared to 24 per cent for the previous year. Similarly, the per share earnings growth of 24 per cent is pegged higher than the 20 per cent the previous year.

The company has clarified that this guidance does not take into account the impact of fringe benefit tax introduced in the latest Budget. The closer alignment of revenues and per share earnings clearly reflects that margins, at the operating and net level are expected to remain stable. This is quite an encouraging trend.

The underlying streak of conservatism is evident from the fact that Infosys has ended 2004-05 with a 47 per cent rise in revenues and per share earnings, compared to a 24-per cent guidance at the start of the year. Considering that the demand environment for software services is expected to be fairly strong and billing rate upside may emerge from some old and almost all new clients, the company could effect an upward revision in guidance this year also. Infosys, though, says it expects a flat first quarter on account of internal reorganisation and slowdown in work from financial services clients.

Under US GAAP, Infosys has projected a revenue growth of 30 per cent and per share earnings of 24 per cent. Compared to a 44 per cent rise in revenues and 37 per cent growth in per share earnings forecast by Nasdaq-listed Cognizant Technology Solutions for calendar 2005, it is clear that Infosys has decided not to shed its conservative stance of the past.

Since Cognizant's forecast revenue base of $845 million is considerably lower than that of Infosys at $2 billion, it has the ability to grow at a faster pace. However, it is significant to note that Cognizant has also been traditionally conservative in drawing up its financial guidance.

For instance, in 2004, it started with a revenue guidance of 40 per cent and ended the year at 60 per cent growth. In this backdrop, even if we factor in the challenges stemming from competition from the likes of IBM Global/Accenture or entry into new service lines or geographies, an upward revision in the guidance by Infosys may be in the offing, probably in the second quarter of 2005-06.

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