Infosys Technologies reported an 18.9 percent rise in quarterly profit in dollar terms Friday, missing expectations as expenses, global uncertainty and a rising rupee squeezed margins.
Investors, who were also unsettled by a tepid outlook for earnings growth and the decision of key board member T.V. Mohandas Pai to retire, sent the bellwether stock down 9.6 percent Friday.
Infosys rarely misses expectations and the news offered a disappointing kickoff to earnings season for India's $60 billion software services sector, which has been pinched by wage hikes and a rising rupee.
Net profit at India's No. 2 outsourcing company was 18.2 billion rupees ($402 million) for the quarter ending March. Revenues grew 23.6 percent in dollar terms, to 72.5 billion rupees ($1.6 billion).
Analysts surveyed by FactSet had expected a quarterly profit of 18.5 billion rupees ($414 million) on sales of 73.6 billion rupees ($1.65 billion).
"We are factoring in that the rupee is getting stronger," said Ashok Vemuri, head of global banking for Infosys. "We are seeing the fact that there continues to be wage pressure. We have to factor that in especially in India."
Europe's debt crisis and Japan's debilitating quake added to slowness _ particularly in financial services revenues_ in the March quarter, which is generally soft as clients finalize their IT budgets, he added.
Vemuri said a few Japanese banks pulled back on new projects following March's devastating tsunami, but anticipates that cost pressures in Europe will ultimately be a boon for the company.
"Even though we may not get a lot of revenue from Japan, the effect of Japan will be felt for a longer period than we give it credit," he said. "The issues in Europe will be beneficial for us in throwing up interesting opportunities. They realize they have been left behind on the tech curve and they are facing significant cost pressure."
He said that despite fears of another protectionist surge in advance of U.S. elections, American clients are sending more work offshore than last year.
"We are not hearing our clients talk about protectionism," he said. "They have increased the percentage of work they give to offshoring companies."
Kotak Securities analyst Dipen Shah said earnings guidance in rupee terms was lower than expected for the year.
"They are taking into account most of the negatives," he said. "This may prove to be conservative going ahead."
Infosys said earnings for this fiscal year, which ends in March 2012, would be 126.05 rupees to 128.21 rupees ($2.83 to $2.88) per share, up 5.5 percent to 7.3 percent in rupee terms from the prior year. Revenues for the fiscal year should come in between 317.3 billion rupees and 322.7 billion rupees ($7.13 billion to $7.25 billion), annual growth of 15.4 percent to 17.3 percent in rupee terms.
While the rising rupee will likely hit margins by 1 percentage point, the company's outlook for 10 to 12 percent wage hikes for offshore employees this fiscal year represents less wage pressure than last fiscal, when a fight for talent helped drive up salaries at Indian outsourcing companies by 12 to 14 percent, said Shah.
Infosys is also undergoing an unsettling shift of top management. Human resources head T.V. Mohandas Pai said Friday he will retire in June.
Vemuri said Pai plans to dedicate himself to "nation-building" in the field of education, but declined to say whether Pai would work for the government like Infosys co-founder Nandan Nilekani, who left the company to helm India's ambitious national identification program.
Company co-founder K. Dinesh will also retire in June.
Ravi Venkatesan, former chairman of Microsoft India, was appointed to the board of directors on Friday, a move to be confirmed by shareholders at the next general meeting.
Board chairman N.R. Narayana Murthy plans to retire in August. The board said it would meet in April to hammer out succession plans.