BANGALORE (Reuters) - Infosys Technologies'(INFY.BO) posted an unexpected decline in quarterly profit, saying a weak European economy could curb new orders and dampen a recovery for India's outsourcing sector.
The news sent the company's shares down in India and the United States.
Infosys, a trendsetter for India's $60 billion IT services sector, added 1,026 staffers in April-June, its slowest hiring pace in four quarters. That indicates the sector's rebound from the global recession may be bumpy.
"There are still concerns lingering over Europe's debts, and if the economy there is weak, consumption should be weak too," said Huey Yang, a fund manager with HSBC in Taipei.
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India's No. 2 outsourcer's profit fell 2.6 percent in the first quarter ending on June 30. Europe's contribution to sales dropped to about 20 percent from nearly a quarter a year earlier and 23 percent in the previous period.
"There are specific clouds on the horizon and we don't know if they are simple rain clouds ... or there is a cyclonic storm ahead of us," said Chief Executive Officer Senapathy Gopalakrishnan, one of the seven engineers who set up Infosys in 1981 with $250.
The disappointing profit and hiring sent its shares down as much as 3.8 percent in a steady Indian market. Trading volume was nearly 7 times the daily average over the past 30 days.
The shares ended 3.4 percent lower in India on Tuesday, their worst single-day fall in more than a year after hitting a record high on Monday.
Its U.S.-listed shares were down 4.8 percent at $60.02 on the Nasdaq late on Tuesday morning.
Infosys, which counts Goldman Sachs, BT Group and BP among its more than 550 customers, forecast its 2010/11 dollar revenue to rise 19 to 21 percent, higher than the 16 to 18 percent projected in April.
Known for its conservative outlook, the company has raised its full-year revenue growth forecast in dollar terms in the last three consecutive quarters.
Infosys and local rivals Tata Consultancy Services and Wipro have raised salaries by 10 to 20 percent on average to keep staff from being poached by global rivals.
Tata Consultancy, the country's leading outsourcer, is expected to report a 16 percent rise in quarterly profit when it issues results on Thursday.
"We see caution all around but mostly in Europe. The U.S. clients have started spending. We are seeing traction in multiple segments," said S. Shibulal, Infosys' chief operating officer.
Infosys, whose sprawling Indian campuses house pizza and Subway outlets and golf courses, and local competitors have been targeting Europe and Asia Pacific in the past few years after a slowdown in the United States hit sales in their biggest market.
Bangalore-based Infosys forecast full-year profit margins would drop 150 basis points on a decline in prices for its services and salary increases. Salary hikes in the quarter impacted margins by 300 basis points.
It raised its annual hiring forecast to 36,000 from 30,000 outlined in April and versus 27,639 staff hired last year.
Entry-level engineers are paid 35,000-40,000 rupees per month ($748-$855) on average, about a fifth of the Western wages but the salaries are seen as lucrative in a country where 40 percent of the 1.2 billion people live on less than $2 a day.
In a report this month, research firm Forrester said Europe's volatile economic situation and uncertainty about corporate IT budgets would result in possible delays or cancellations of some outsourcing projects.
Competition from IBM, Accenture and Hewlett-Packard also poses risks to Indian companies, which manage complex computer networks and maintain technology operations for Fortune 500 customers.
"The numbers are really bad at operating levels, they are 40-50 basis points down than what we had expected," said Shradha Agarwal, analyst at Batlivala & Karnani Securities. "The numbers would not see a significant upgrade from these levels."
The company expects earnings per American depositary share to rise 5.2 to 9.6 percent for the year, up from its previous forecast of 4.3 to 8.6 percent.
Some investors, however, said Infosys' prospects remained strong.
"Despite what has been talked about globally, about euro and other regions, and the slowdown, I think clearly from our uptake perspective on the IT services, Infosys is very confident about growth and the overall industry is also very confident about growth," said Nitin Jain, principal investment manager at Kotak Mahindra in Singapore, which owns Infosys shares.
Infosys said net profit in its fiscal first quarter ended June 30 fell to 14.9 billion rupees ($318 million) from 15.3 billion rupees a year ago.
A Reuters poll of brokerages had forecast a profit of 15.56 billion rupees. Infosys reported under the International Financial Reporting Standards for the second successive quarter.
($1 = 46.8 rupees)
Writing by Sumeet Chatterjee; Additional reporting by Baker Li in Taipei, Harry Suhartono in Singapore, Jim Finkle in Boston and Reuters India company news team; Editing by Ranjit Gangadharan, Anshuman Daga and Matthew Lewis