Stay Away From Infosys

NEW YORK (TheStreet) -- Infosys (INFY) managed to beat the market's earnings estimates in its recent quarter, but that was just about the only good thing to cheer about.

The better-than-expected performance has come on the back of the weakness in the Indian rupee. Excluding the impact of exchange rate fluctuations, the company continues to struggle with growth in its key markets: North America and Europe.

Moreover, the strengthening rupee and the company's failure to rein in its retention rate can put a serious dent in its turnaround efforts, even as the industry grows.

For these reasons, the company's stock is down 9.3% this year, currently around $51, and may continue to struggle in the future.

In the previous quarter, the company's revenue climbed 8% year over year to $2.09 billion while its net profit increased by 9.7% to $487 million, or 85 cents a share. This was due to higher volume, client additions and improvements in big data and cloud services. The weakness in the rupee has also given a boost to the earnings of Infosys and other players in this industry such as Tata Consultancy Services and Wipro (WIT).

Infosys's revenues were in line with analysts' estimates, while earnings were better than analysts' estimates.

In the previous quarter, Infosys added 50 new clients, mainly in financial services, manufacturing, telecommunication and energy utilities segments. The number of its lucrative "million-dollar clients" has gone up by 15% from last year to 501.

Infosys has also won several large outsourcing contracts from government agencies as well as from companies operating in the communication, energy, financial services and health care industries.

The business has reported growth in the advanced technology solution as it has signed 47 new deals for its big data and cloud offerings, mobility offering and for engineering services.

One of its major wins has been a multiyear contract from Volvo to provide applications that would support multiple operations ranging from product development to customer services. Besides this, the company has also signed an outsourcing contract with an unidentified "large European bank," to manage its applications portfolio.

The India-based company continues to generate more than 60% of its annual revenue and just a little less than 60% of its profits from North America. In the previous fiscal year, the company's revenues from the region increased by 8.8% to $5 billion.

That being said, in constant-currency terms, Infosys witnessed a 1% drop in quarterly revenues from North America. Meanwhile, the company's revenues from Europe, which accounts for nearly a quarter of Infosys's sales, increased by just 1%. This was disappointing as it comes amid improvement in macroeconomic conditions which has created a healthier environment for outsourcing deals, according to the ISG Outsourcing Index.

In other words, in the previous quarter, the company did not witness any meaningful growth in its two primary markets. The gains can be largely attributed to the weakness in the rupee.

The recent strength in the rupee can erode the gains that Infosys and its Indian peers have been enjoying for months. In the last three months, the Indian rupee gained 4% against the dollar. Moreover, the markets are expecting further strength in the future as the political situation in the country stabilizes following the general elections.

To exacerbate the situation, the company continues to struggle with retaining its employees, including some of its oldest veterans. Earlier this year, the company's senior vice president Chandrashekar Kakal resigned, which was the ninth exit from a senior executive in less than a year.

According to the company's management, the company's attrition rate was 18.7% in the fourth quarter, an increase from 16.3% in the corresponding quarter last year and 18.1% in the third quarter.

This attrition rate is one of the highest in the industry, which is particularly alarming for Infosys since this industry already suffers from a lack of skilled workers.

Infosys is currently working to reduce this attrition rate. The company has offered two increases in compensation packages for its employees in the last nine months. However, a sequential as well as year-over-year rise in attrition rate shows that so far, its plans have not worked.

The technology firms, however, are eyeing growth on the back of an expected increase in worldwide IT spending, an improvement  from nearly flat growth in 2013.

Although the industry outlook is positive, it remains to be seen whether Infosys will be able to capitalize on this trend. So far, in the first quarter of 2014, Infosys's competitors Cognizant Technology (CTSH) and Computer Science Corporation (CSC) have taken a bigger share of the global IT expenditure than Infosys. This was revealed in a survey conducted by Citi Research.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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