Infosys Rallies, Faces Headwinds

Infosys Technologies ( INFY), one of India's largest outsource providers, boosted quarterly income by 40% and posted its first $1 billion year, the company announced before the opening bell Tuesday.

The company also said it expects revenue to grow by 30% to 31% in fiscal 2005, will conduct a 2-for-1 stock split and pay a special dividend of $1.15 per existing share.

In recent trading, Infosys' American depository shares (ADS) were up $2.10, or 2.5%, to $86.10.

However, rising salaries, a possible backlash against outsourcing and an appreciating currency will slow earnings growth; the company expects earnings per share to increase by 27% in 2005, compared to 38% the year before. "The rise in the rupee is definitely one of the concerns and we have factored in a reasonable appreciation," Infosys CEO Kris Gopalakrishnan told Reuters. The rupee has gained nearly 9% against the dollar so far this year.

With the U.S. losing thousands of jobs to India, where companies like Infosys provide much cheaper information technology services, American politicians are making outsourcing a political issue.

"So far all the rhetoric against outsourcing has been just talk. The company delivered a nice upside surprise," said analyst Mayank Tandon of Janney Montgomery Scott.

However, Tandon noted that revenue growth from North American clients was flat in the last quarter, a development the company blamed on "timing" issues related to one customer. "Investors need to watch this along with the currency issue and see what Wipro ( WIT) and other competitors say about North America when they report." Wipro will report earnings on Friday. (Janney does not have a banking relationship with Infosys or Wipro.)

For the quarter ended March 31, Infosys' net income was $76.8 million, up from $53.1 million a year ago, on sales of $302.7 million. Earnings per share were 58 cents, 3 cents above management's prior guidance and 2 cents above Wall Street's expectations.

For the full year, revenue was a record $1.06 billion, up from $753.8 million in fiscal 2003.

Looking forward, the company expects revenues in the June, or fiscal first quarter of 2005, to range from $314 million to $316 million and from $1.38 billion to $1.39 billion for the fiscal year. Earnings per ADS are expected to be 58 cents for the quarter and $2.61 for the year. Current consensus estimates are 58 cents for the quarter and $2.57 for the year, according to Thomson First Call.

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