Infosys Will Bite Itself Soon Unless...

Infosys (NasdaqGS:INFY) released the latest numbers and beat expectations when calculating in rupee's. I do not calculate in rupee's. Readers probably do not calculate in rupee's. Infosys work force may eventually stop calculating in rupee's.

The outsourcing thing has been very successful. However it now has changing dynamics. The revenue drivers are overall IT spending and FX ratios (if currencies are allowed to trade freely). The cost drivers continue to be local labor costs and FX ratios. Another contract or two will probably not change shareholders opinion of this very high PE ratio stock.

Infosys probably understand this as they are establishing a development facility with approximately 300 seats in Mexico. The costs (mostly in Peso's) will be a US$ proxy. The challenge for Infosys which also trades on India's stock exchange will be to reallocate work flow and costs into cheap countries and avoid the increasing costs of previously cheap but very adequate Indian workers.

Clients will become increasingly concerned about locking in FX differentials. Look for outsourcing contracts to start including robust FX guarantees. Infosys will most likely start to include the FX lock in to avoid margin squeezes. Clients will look at end dates of contracts and may actually wish to extend when FX forward rates look favorable.

The Infosys play is running to its natural end game as it becomes another commodity provider much like the mining business which traditionally copes with local labor costs and FX rates. At least the resources business has a forward commodities market.Infosys is currently internalizing that entire risk.