Foolish Forecast: Infosys Rides the Rates

Indian outsourcer Infosys (Nasdaq: INFY  ) reports second-quarter 2008 earnings Wednesday after close of trading. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell, or waffle? Thirty analysts follow Infosys. Twenty-seven of them think it's a buy; only three say hold.
• Revenue. Analysts are looking for 33% growth, to $992 million.
• Earnings. Profits are expected to grow a bit slower, up 31% to $0.46 per share.

What management says:
Reporting Q1 earnings back in July, Infosys cited "increasing demand for its business solutions and strong growth in service lines" in predicting that Q2 revenue would range from $974 million to $984 million (below estimates, you'll note). However, management nonetheless forecast $0.46 EPS in profit -- and analysts faithfully cribbed that number.

What management does:
Lending credence to management's profit forecast is the continuing trend of net margin expansion at Infosys. Notwithstanding a recent weakening in the firm's gross margins, and erratic performance at the operating level, rolling net margins have been steadily rising for the past year and a half.

Margin	3/06	6/06	9/06	12/06	3/07	6/07
Gross	42.2%	41.8%	41.9%	42.1%	42.5%	41.7%
Operating	27.8%	27.2%	27.4%	27.3%	27.6%	27.1%
Net	25.8%	26.0%	26.1%	26.3%	27.5%	28.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Because Infosys works for major Western clients such as Hewlett-Packard (NYSE: HPQ  ) , Goldman Sachs (NYSE: GS  ) , Boeing (NYSE: BA  ) , and J.C. Penney (NYSE: JCP  ) , and consequently gets paid in U.S. dollars, investors need to keep an eye on currency exchange rates -- especially with a view to evaluating how likely the firm is to meet its profit projections. Last quarter, CFO V. Balakrishnan blamed "the sharp appreciation of the rupee against all major currencies" for hurting operating margins in Q1. Reviewing the recent movements in exchange rates, I don't think this is a big risk for tomorrow's news -- the rupee lost value against the dollar for much of the quarter, before appreciating sharply again in mid-September.

If it continues, however, the recent devaluation of the dollar may pose a risk to profits later this year -- and to forward guidance tomorrow.

For more info on Infosys, read:

• Before the Call: Infosys Sizzles
• Rising Rupee Affects Infosys: Fool by Numbers
• Infosys Still Rocked by the Rupee