Friday, January 16, 2009

Infosys "Constant Currency" Q3 results!

I don't have anything against Infosys. This is an objective assessment of what was stated by the Infosys Board members on CNBC TV18 telecasted discussion of the Q3 results.

Along with millions of investors, IT employees, etc I watched the Infosys Q3 results discussion with the highly regarded Infosys Board; with presenters Udayan and Mitali a few days back. My view is that Infosys revenues fell during Q3. Infosys fired a large number of people and asked a large number of people on site to go on loss of pay leave. This reduced their outflow on salaries. The USD/INR exchange rate improved the company's margins. Overall, revenues fell in all geographies when measured in the same currency against previous quarter numbers. Margins improved because of a stronger dollar, and because of the culling of the bench. Infosys didn't do anything miraculous in terms of their business process to improve their margins dramatically.

The outlook for CY 2009 is truly dire. A lot of clients are on the verge of bankruptcy filing. There's little chance of any new projects coming Infosys's way. It's a volatile currency world. Infosys just has an unsophisticated foreign currency receivable hedging process, in which they mainly use non deliverable currency forward contracts, like a commodity export/import business. There was really nothing objective to cheer about in the Q3 results. Yet the stock price rose after the Board's TV discussion of the Q3 results.

At the Q3 results discussion the "constant currency" reasoning was presented by the Board.

While discussing revenues, the Board asked investors to take the view that there wasn't much decline in "underlying business volume" because you have to allow for the currency fluctuation. For instance revenues from the UK and Europe showed up lower when measured in USD because the US dollar strengthened against the GBP and EUR.

While discussing margins and net profits, one Board member stated that Infosys has a model which helps them to retain high margins even when the utilization is lower. The current crisis is a test of the model, he indicated.

I don't think there is any such model which can defy basic arithmetic. The viewer was supposed to accept the revenue as ok, as not having declined much, in "constant currency" terms. While looking at margins and net profit, the Infosys Board didn't apply their constant currency argument.

The good margins weren't because of a strengthening dollar, according to the Infosys Board. Infosys has a secret model that nobody has heard of. The model helps them to make high margins even when they have fewer people working on projects.:-)

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