Infosys Technologies Ltd, India's No 2 software services exporter, said quarterly profit rose by nearly a fifth but its shares tumbled 7 percent on market concerns over the rapidly rising rupee and the risk of a U.S. downturn.
The decline was the stock's biggest single-day drop in 3-Â½ years, with investors disappointed that the profit figure had only matched analysts' forecasts and unhappy with the company's business outlook, which they saw as muted.
Infosys and rivals top-ranked TCS and No 3. Wipro Ltd have been winning big outsourcing contracts from Western firms seeking to cut costs.
But investors have shunned the sector amid worries about the effect of the rupee hitting 9-Â½ year highs against the dollar, rising wages and a possible slowdown in a U.S. economy buffeted by the subprime mortgage crisis.
The earnings indicate it's getting difficult for even a big company like Infosys with the dollar getting weaker, said Neeraj Dewan, director at Quantum Securities.
Infosys shares fell as much as 7.70 percent, dragging down the outsourcing sector, before ending down 7 percent at 1,976 rupees, their biggest daily fall since May 17, 2004.
The firm, which develops applications, designs supply chains and offers back-office services, said its July-September net profit rose 18 percent to 11.0 billion rupees ($280 million) from 9.3 billion rupees a year ago, in line with forecasts in a Reuters poll of 12 brokerages.
Nasdaq-listed Infosys, which ranks behind Tata Consultancy Services (TCS) in India's $31.4 billion software services export industry, forecast a 19.4-19.8 percent revenue increase in rupee terms in the year to March, up from an earlier estimate of a 16.9-18.3 percent rise.
Infosys said its margins may fall by 50 to 100 basis points in the 2007/08 fiscal year that ends next March.
It said it would lose around 20 billion rupees ($510 million) in revenue in 2007/08 because of the rupee, which has risen more than 12.5 percent against the dollar this year.
They have been able to show some cost efficiency on the operating margin front, but growth concerns are still there, be it the U.S. economy slowdown or the rupee appreciation, said Harshad Deshpande, IT analyst at Religare Securities.
Those concerns saw Infosys shares fell 1.7 percent in July-September, sharply underperforming an 18 percent rise in the main Mumbai index.
But sentiment had been picking up, with the stock up 12 percent this month at Wednesday's close.
I think one should take this opportunity to get out, said Gajendra Nagpal, chief executive of Unicon Financial. The stock has run up too much, and it's difficult to presume they will continue to give returns at 25-26 percent.
A large pool of English-speaking workers and cheaper wages have helped attract outsourcing by firms such as Cisco Systems, General Electric and Airbus, but there are concerns the sector's earnings growth could slow.
Infosys, whose clients include ABN AMRO, Goldman Sachs and Royal Philips Electronics, added 48 new clients in the September quarter and said operating margins improved, with pricing remaining stable with an upward bias.
The rupee, which rose more than 2 percent against the dollar in July-September, is a worry for a sector that earns more than half its revenue from the United States.
It's a challenge, we have to manage it, Infosys CFO V. Balakrishnan told Reuters.
Analysts estimate that every 1 percent rise in the rupee that is not hedged slices 30-50 basis points off software firms' margins, although most companies have significantly increased their currency hedging positions.
Infosys said it had currency hedges worth $1.4 billion as at Sept. 30.
(Additional reporting by Devidutta Tripathy and Himangshu Watts)