Whilst slow, Infosys 2Q 10 results are a reflection of a recovery in global IT spend. The 2.1% q-o-q growth reported in revenues was a marked improvement over the 2.6% and 2.9% q-o-q decline the company witnessed in 4Q 09 and 1Q 10, respectively. However, guidance provided suggests a q-o-q decline in 3Q 10 and marginal growth the following quarter, which is below street expectations and in our view a very conservative approach adopted by Management. IT spending is recovering and in our view the coming quarters will witness stronger growth due to improved corporate decision making abilities. The company has also increased their planned employee intake for the entire year from 18,000 to 20,000 with the intent to hire more lateral and experienced professionals in preparation for growth opportunities with demand rebounding. Our revenue estimates for FY 2010 therefore stand unchanged at above company guidance for the year as we expect stability in the demand environment setting in and pressure for price cuts easing off. Gartner, Inc's (an information technology research and advisory firm) latest predictions portray 3.3% y-o-y growth in worldwide IT spending to US$3.3 tn in 2010, an improvement from the 5.2% y-o-y decline expected in 2009. Management has guided to a 200 bps drop in margins spread over 3Q 10 and 4Q 10, mainly on account of wage increases scheduled during the period. With the margin expansion achieved in 1H 09 due to disciplined cost control measures, the net impact of the incremental costs arising from wage hikes is expected to result in operating margins moving in a narrow band of 50-100 bps for FY 2010. We believe that outsourcing revenues will be relatively cushioned by the economic downturn as companies will continue to explore low cost opportunities to reduce operational costs. This is also reflected in the 3% q-o-q growth witnessed in Infosys offshore business volumes in 2Q 10. While overall volumes fell, an improvement in blended pricing drove 1Q 10 revenue growth. This in itself provides a cushion to margin performance. We believe long-term prospects for Infosys remain strong post recovery in economic conditions the world over, as demand for IT outsourcing remains. The company's fundamentals remain strong, aided by a healthy business model, coupled with inherent business levers such as utilization, scale benefits, offshore-onsite revenue mix, competent management and a strong balance sheet. However, after the significant run-up in stock price, current levels do not augur well for an attractive investment opportunity presently as upside seems limited.

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