Infy: Tight belt policy - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Infy: Tight belt policy

Jan 10, 2002

The most positive aspect of the Infosys’s performance has been the fact that the company has managed to improve operating margins by a significant 70 basis points. This is a remarkable achievement considering the current business environment. The company has managed to achieve this feat by making a part of the salaries variable. The variable part of the salaries are linked to certain targets. As these targets have not been met, the company’s employee costs have shown a lower growth. Infosys has also managed to reduce its communications cost by renegotiating with its service providers. The indication of the tough environment is evident from the fact that the company saw price decline (billing rates) of 3.2% in dollar terms. However, this effect was offset by a growth in volumes of 3.4%. Consequently, in US dollar terms the company managed to post a sequential growth of marginal 0.2%. However, in Indian rupees the sequential growth in revenues translates to 1.6%.

Infosys 3QFY02 results

Geography

Revenues from all geographies other than ‘rest of the world’ grew. This is quite contrary to expectations. Asia pacific is one of the fastest growing IT markets and Infosys has been eyeing this market keenly. Infact during 3QFY02, the company had opened an office in Singapore.

The highest growth (7.3%) was recorded in domestic sales. This however is on a very small base. Europe exhibited strong growth of 4.3% sequentially, while revenues from the US grew by 1.3%.

The company has been steadily de-risking is business concentration. Compared to 9mFY01, contribution of revenues from US has come down from 74%. This has been offset by similar increase in contribution from the other three geographies. This translates to the fact that US has been the slowest growing geography for the company (26% growth). While revenues from rest of the world grew by 49% during 9mFY02, Europe also grew almost as strongly (42%). But the highest growth rate came form India. Infosys’ product for the banking industry, Finacle, has been a great success and the significant jump in revenues from India is due to many banks choosing to deploy the aforesaid software.

Service offerings

The service offerings that saw a decline on sequential basis included maintenance, consulting and testing. Infosys’ growth so far in FY02 has largely been based on growth in maintenance revenues. Therefore, a decline in revenues from the segment is a cause for concern. The list of offerings that exhibited strong growth was led by package implementation (24% sequential growth). Infosys has recently strengthened its presence in the segment by forging a partnership with TIBCO. The product sales also continued to show strong growth.

Service offerings (% of revenues) 2QFY02 3QFY02 Growth 9mFY01 9mFY02 Growth
Development 31.7% 31.7% 1.6% 42.2% 32.1% 0.3%
Maintenance 29.4% 28.2% -2.5% 24.5% 28.8% 55.1%
Re-engineering 10.6% 10.6% 1.6% 9.0% 10.8% 58.3%
Package implementation 8.7% 10.6% 23.8% 6.8% 9.4% 82.4%
Consulting 4.3% 3.7% -12.5% 4.8% 4.3% 18.2%
Testing 2.9% 2.7% -5.4% 2.9% 2.9% 31.9%
Engineering services 2.6% 2.9% 13.4% 1.6% 2.5% 106.1%
Other services 6.0% 5.5% -6.8% 5.7% 5.5% 27.3%
Total services 96.2% 95.9% 1.3% 97.5% 96.3% 30.3%
Products 3.8% 4.1% 9.7% 2.5% 3.7% 95.2%
Total revenues 100.0% 100.0% 1.6% 100.0% 100.0% 31.9%
Internet / E-commerce related 23.5% 23.1% -0.1% 29.5% 23.2% 3.7%

During the nine months of the fiscal the company’s business mix has changed in favour of maintenance. A mere 0.3% revenue growth from development indicates that clients have cut back on development projects and have concentrated on maintenance work. Other services that have shown strong growth during the course of the fiscal are engineering services, package implementation and products. However, revenues from e-commerce and consulting have performed relatively modestly. Going forward the trend is likely to continue. While the revenues from development are showing signs of reviving, the concern is that revenues from maintenance are showing signs of weakness. This is due to the fact that for almost three quarters now all the Indian software companies have been focusing on this maintenance related projects from revenue growth. The markets therefore, could have become overcrowded.

The engineering services could possibly be another area that could continue to show strong growth. Wipro recently tied up with Geometric Software to broaden its service offerings. This could have been in anticipation of a strong growth in demand for these services.

Industry verticals

All the industry verticals that contribute significantly to Infy’s revenues have shown weakness. Revenues from BFSI (Banking, Financial Services and Insurance) verticals declined by 9% sequentially in 3QFY02. This was due to its clients from financial services industry facing tough times due to depressed stock markets. The clients from the insurance segment also exhibited negative growth. Post Sept 11, financial services and insurance companies were the worst hit, as selling in stock markets kept investors away and on the other hand, many insurance companies had to pay damage claims. Investment banking activity had weakened. The stock markets have since recovered, but it will take some time for spending to pick up from these verticals. Consequently, the company has given a very tough guidance for 4QFY02, indicating a 3.8% sequential decline in sales.

Industry vertical (% of revenues) 2QFY02 3QFY02 Growth 9mFY01 9mFY02 Growth
Manufacturing 17.2% 15.9% -6.0% 17.8% 17.1% 26.7%
Insurance, banking & financial services 38.2% 34.2% -9.0% 33.7% 36.5% 42.9%
Insurance 17.5% 15.7% -8.8% 14.4% 16.6% 52.1%
Banking & financial services 20.7% 18.5% -9.2% 19.3% 19.9% 36.0%
Telecom 15.3% 15.1% 0.3% 18.5% 15.7% 12.0%
Retail 11.5% 13.6% 20.2% 8.3% 12.1% 92.3%
Utilities 1.7% 2.7% 61.4% 1.4% 2.1% 97.9%
Transportation & logistics 2.8% 2.3% -16.5% 2.2% 2.5% 49.9%
Others 13.3% 16.2% 23.8% 18.1% 14.0% 2.0%

The revenues from the telecom segment have shown some growth after declining for the past two quarters. This is due to the fact that equipment manufacturers like Nortel and Cisco continue to face difficult market conditions. However, Infosys has indicated that these companies have started releasing projects and therefore, the worst might be over for this segment.

The company added 33 new clients (28 in 2QFY02) during the quarter taking the number of active clients to 299. Some of the notable clients added during the quarter were Sun America Inc, Aizawa Koatsu Concrete KK, Texas Instruments, Spatial Wireless, National Health Services and Target Corporation. Infosys also signed up a fortune 100 company from the insurance vertical and two fortune 500 companies from the retail and transportation verticals as clients.

The clear indication from the company’s numbers is that the environment continues to be very challenging and uncertain, as signs of recovery in the technology sector might be premature. However, it’s a superb performance, wherein the company has managed to improve its operating margins, brought down its days receivables to 44 (50 in 2QFY02) and has no accounts receivables more than 90 days old. This only proves why the management of the company is so revered. As for those concerned about growth, a consolation could be that the company is sitting on a little more than Rs 0.8 bn in cash. An acquisition could easily boost the topline.


Equitymaster requests your view! Post a comment on "Infy: Tight belt policy". Click here!

  

More Views on News

INFOSYS 2019-20 Annual Report Analysis (Annual Result Update)

Aug 5, 2020 | Updated on Aug 5, 2020

Here's an analysis of the annual report of INFOSYS for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

INFOSYS Announces Quarterly Results (1QFY21); Net Profit Up 12.4% (Quarterly Result Update)

Jul 16, 2020 | Updated on Jul 16, 2020

For the quarter ended June 2020, INFOSYS has posted a net profit of Rs 43 bn (up 12.4% YoY). Sales on the other hand came in at Rs 237 bn (up 8.5% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS Announces Quarterly Results (4QFY20); Net Profit Up 6.3% (Quarterly Result Update)

Apr 21, 2020 | Updated on Apr 21, 2020

For the quarter ended March 2020, INFOSYS has posted a net profit of Rs 43 bn (up 6.3% YoY). Sales on the other hand came in at Rs 233 bn (up 8.0% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS 2018-19 Annual Report Analysis (Annual Result Update)

May 21, 2019 | Updated on May 21, 2019

Here's an analysis of the annual report of INFOSYS for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

INFOSYS SHARE PRICE


Sep 25, 2020 11:17 AM

TRACK INFOSYS

  • Track your investment in INFOSYS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

INFOSYS - KINGDEE INTER. COMPARISON

COMPARE INFOSYS WITH

MARKET STATS