India's Infosys Technologies said quarterly profit rose 18%, in line with forecasts, but its shares fell 7% on investor concern over a rising rupee, soaring wages and a U.S. slowdown.
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% revenue increase in rupee terms in the year to March, up from an earlier estimate of a 16.9-18.3% rise.
"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, TCS and third-ranked Wipro 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 9-½ year highs against the dollar, rising wage costs and a possible slowdown in a U.S. economy buffeted by the subprime mortgage crisis.
Sentiment had been picking up, with Infosys shares up this month at Wednesday's close on hopes of stronger earnings, but investors were disappointed when September quarter profit only matched forecasts, and the outlook was seen as muted.
Infosys shares fell 6.95% to 1,976.85 rupees on Thursday, dragging down the outsourcing sector and weighing on a Mumbai market that earlier hit a record high.
"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%."
Infosys, whose clients include ABN AMRO, Goldman Sachs and Royal Philips Electronics, said July-September net profit rose 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.
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, which develops applications, designs supply chains and offers back-office services, 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% against the dollar in July-September and has risen more than 12% this year, 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% 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.
Infosys shares fell 1.7% in July-September, sharply underperforming an 18% rise in the main Mumbai index, but beating a near 5% drop in the sector index.