Infosys sees challenges, strong growth momentum

File photo of Infosys Technologies Chief Executive S. Gopalakrishnan speaking at the Reuters India Investment Summit in Bangalore, December 7, 2007. Infosys reported a near-10 percent rise in profit and gave a confident medium-term outlook despite a slowing U.S economy hitting outsourcing deals.

BANGALORE (Reuters) - Infosys Technologies Ltd, India's No. 2 software services exporter, reported a near-10 percent rise in profit and gave a confident medium-term outlook despite a slowing U.S economy hitting outsourcing deals.

The Nasdaq-listed firm just missed market forecasts for its March quarter profit on Tuesday and sounded cautious on its short-term outlook, but its shares jumped as much as 7.2 percent on the outlook and an increased dividend pay-out ratio.

"The forecast is absolutely in line with expectation. At least the uncertainty associated with IT seems to be disappearing," said Arun Kejriwal, strategist at research firm KRIS. "The projections are robust, considering the fact Infosys generally come out with conservative estimates."

India's estimated $64 billion software services sector has been hit by slower growth from battered banks and financial firms, sectors that contribute most to the industry's revenue.

Infosys, the first in the sector to report results, remained confident, despite market expectations its growth will slow on growing evidence of a recession in the United States.

The firm, which counts Goldman Sachs, ABN AMRO and Philips Electronics among its 500-strong clients, forecast revenue for the year to end-March 2009 would grow 19-21 percent to $4.97-$5.05 billion, after rising 35 percent last year.

"While there could be short-term challenges due to global economic uncertainties, we see significant growth opportunities in the medium to long term," Chief Executive S. Gopalakrishnan said.

Shares in Infosys closed 6.2 percent higher at 1,510.80 rupees, helping lift the broader market, which rose 2.2 percent. The stock was boosted by an increase in the dividend pay-out ratio to up to 30 percent of net profit from 2008/09 from 20 percent, analysts said.

Infosys shares have fallen for five successive quarters on worries about a strong rupee, increasing wages and pessimism on the U.S. and global economic outlook.

"The shares were beaten down so much, the higher pay out is a good idea," said Harit Shah, IT analyst at Angel Broking, which has a 'hold' rating on the stock. "But there's not much steam left in the stock from here."

Infosys fell 21 percent last year and was the worst performer in the benchmark index, which rose 47 percent.

STRONG MOMENTUM

Helped by an army of English-speaking workers and cheaper wages, India's software services sector has thrived by winning deals from overseas clients, with the U.S. accounting for more than half of the sector's revenue.

"Business momentum continues to be strong," Chief Financial Officer V. Balakrishnan told Reuters in an interview. "The deal pipeline continues to be good; we are not seeing major delays."

Infosys, which develops applications, designs supply chains and offers back-office services, reported a 9.6 percent rise in January-March net profit to 12.5 billion rupees ($313 million) from 11.4 billion rupees a year ago. Profit included a $5 million benefit from a tax reversal.

A Reuters poll had forecast net profit of 12.6 billion rupees for Infosys.

Bigger rival Tata Consultancy Services, which reports on April 21, said last month two of its 15 biggest clients had delayed some projects during the quarter.

Infosys, a trendsetter in India's software services sector, was set up in 1981 with $250 borrowed from the spouses of its seven founders, who include Gopalakrishnan.

Balakrishnan said Infosys' billing rates were expected to stay stable, helping maintain operating margins at last year's level of 31.5 percent, and there were 15 "large deals in the pipeline", each worth more than $100 million in revenue over 4-5 years.

The company was looking at a wage increase of 11-13 percent for staff in India in the June quarter, and said it would take 2.3 percent off its margins in the quarter.

Indian software exporters are pushing into emerging markets, but analysts see no quick change in their revenue stream, compared with rivals such as Accenture that gets 60 percent of its revenue from outside the United States.

Last month, Accenture beat quarterly profit forecasts on strong consulting and outsourcing demand and increased its full-year earnings forecast.

(Additional reporting by Narayanan Somasundaram)