For now, the U.S. financial-services sector is back in play, and that helped power an upside surprise for Indian IT outsourcer Infosys (NYSE: INFY ) .
Infosys -- whose largest segment is in North American financial services -- posted fiscal 2010 third-quarter revenue of $1.2 billion. Following a weak performance in the previous quarter, that figure represents mid-single-digit growth both sequentially and year over year.
Earnings per American depositary share, meanwhile, registered $0.59, for an annual gain of nearly 2%. The bottom line was juiced by unexpected margin expansion, which came courtesy of slightly stronger pricing, higher employee utilization, and cost cuts. The margin strength is particularly notable given that unfavorable currency movements produced a stiff headwind.
Other highlights include 12.2% growth among Infosys' top 10 clients -- nearly twice the companywide rate.
There is, however, a downside to an IT sector recovery. Infosys management sees a talent drought on the horizon, which will likely drive wage inflation. That's a significant concern, given that Infosys plans to triple its international workforce. Investors should note that the company boosted wages in the recent quarter without obvious margin erosion, but that certainly doesn't guarantee more of the same in the future.
Moreover, Infosys' performance is clearly wedded to the health of U.S. financials. Banks such as Citigroup (NYSE: C ) and Wells Fargo (NYSE: WFC ) have undertaken aggressive TARP repayments, which arguably puts these institutions at risk of a capital-ratio decline should U.S. economic conditions not improve in the manner popularly expected. In other words, the entire sector could see another dip, bringing discretionary tech spending to a standstill yet again.
As for valuing Infosys shares, it's a tough call. If earnings grow by 20% in fiscal 2011 (based on expected 2010 EPS), then the stock is now trading at a forward P/E of roughly 21. Certainly reasonable. On 10% earnings growth, however, the P/E rises to 23 -- a significant premium to earnings growth. Where next year's earnings ultimately come in is anybody's guess, but one might take a cue from Infosys' forecast for flat year-over-year EPS in the current quarter (note that the fourth quarter is typically soft for the company).
Meanwhile, investors who are interested in potentially more sober valuations can play an upturn in tech spending through names such as Microsoft (Nasdaq: MSFT ) , Cisco (Nasdaq: CSCO ) , or IBM (NYSE: IBM ) . Alternatively, peer IT provider Cognizant Technology Solutions (Nasdaq: CTSH ) has posted strong results throughout the past year, even as Infosys and others stumbled.
We'll be keeping a close eye on Infosys and its Indian peers as the year rolls forward. For now, remember that Fools don't rush in.
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