X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Infosys: Keep faith! - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jan 10, 2003

    Infosys: Keep faith!

    While Infosys' revenue growth was strong, a sharp decline in operating margins disappointed the markets. Consequently, the stock price has taken a beating on the bourses. After three quarters of strong growth in volumes, as growth in business ceases to be a concern, the question is how much of the growth in revenues will flow to the bottomline.

    As far as the steep decline in operating margins is concerned, Infosys lost 1% due to investments in buying software, benefits of which will accrue going forward. Also, the company's sub-contracting charges for hiring people with specialised skills went up, taking off 0.5% from the operating margins. In the recent past Indian IT services companies have been employing senior employees from global IT services companies to gain better access to larger clients in the west. Thus, the pressure on margins is due to a conscious effort by the company as opposed to competitive pressure. However, going forward the company is more likely to face pressure on margins due to global IT services majors setting up shop in India.

    For Infosys' 3QFY03 results click here.

    Let us take a look at the detailed look at the growth in revenues.

    Geography

    The revenues from all geographies except India increased on a sequential basis. The revenues from the Indian geography declined due to the lower number of client acquisitions for the banking product 'Finacle'. Almost all revenues that Infosys gets from the Indian geography are on account of its banking product. For 9mFY03 the revenues from the US geography have grown by 39%. Consequently, the share of the US geography has once again inched up, stressing the need to put a strategy in place to de-risk the company's revenue stream. However, considering the company's skill sets and the size of the projects, not many economies offer such large size projects, as do the US markets.

    (Rs m) 2QFY03 3QFY03 Change 9mFY02 9mFY03 Change
    North America 6,491 73.8% 7,113 74.2% 9.6% 13,734 71.4% 19,131 73.5% 39.3%
    Europe 1,451 16.5% 1,572 16.4% 8.3% 3,732 19.4% 4,503 17.3% 20.7%
    India 220 2.5% 115 1.2% -47.7% 404 2.1% 469 1.8% 16.0%
    Rest of the world 633 7.2% 786 8.2% 24.1% 1,366 7.1% 1,926 7.4% 41.0%
    Total 8,796 100.0% 9,586 100.0% 9.0% 19,235 100.0% 26,028 100.0% 35.3%

    As expected, the fastest growing revenue stream among all service offerings was package implementation. With corporates directing IT spends to get more out of their existing IT investments, services offerings like package implementation and enterprise application integration are in demand. A pleasant surprise was the strong growth in revenues from testing. Also, the company's dominant revenue stream i.e. development grew 14% sequentially. The 9mFY03 growth figure reveals that while performance of the company was fueled by improvement in development and maintenance services, the company has shown significant growth in revenues from its focus area, consulting. The company has been expecting to move up the software value chain by breaking into the traditional forte of large software companies.

    (Rs m) 2QFY03 3QFY03 Change 9mFY02 9mFY03 Change
    Development 2,744 31.2% 3,144 32.8% 14.6% 6,174 32.1% 8,433 32.4% 36.6%
    Maintenance 2,533 28.8% 2,675 27.9% 5.6% 5,540 28.8% 7,522 28.9% 35.8%
    Re-engineering 528 6.0% 479 5.0% -9.2% 2,077 10.8% 1,432 5.5% -31.1%
    Package implementation 853 9.7% 1,055 11.0% 23.6% 1,808 9.4% 2,525 9.7% 39.6%
    Consulting 413 4.7% 431 4.5% 4.4% 827 4.3% 1,145 4.4% 38.5%
    Testing 264 3.0% 336 3.5% 27.2% 558 2.9% 859 3.3% 54.0%
    Engineering services 237 2.7% 230 2.4% -3.1% 481 2.5% 703 2.7% 46.1%
    Other services 739 8.4% 824 8.6% 11.6% 1,058 5.5% 2,238 8.6% 111.6%
    Total services 8,312 94.5% 9,174 95.7% 10.4% 18,523 96.3% 24,857 95.5% 34.2%
    Products 484 5.5% 412 4.3% -14.8% 712 3.7% 1,171 4.5% 64.6%
    Total revenues 8,796 100.0% 9,586 100.0% 9.0% 19,235 100.0% 26,028 100.0% 35.3%

    Outsourcing, that is expected to drive the company's revenues going forward, grew steadily. The company also managed to add clients in the application outsourcing space. However, the management has termed the size of the contracts to be 'small to medium'. The recent interest in software stocks like Infosys has been on the back of expectations that these companies will bag multi-million dollar contracts. While the company does not classify this service offering separately, revenues of the 'others' head have jumped 111% in 9mFY03. This could point to the company's success on the outsourcing front. On the products front, the company saw a steep decline in revenues on account of a slower pace in client additions.

    (Rs m) 2QFY03 3QFY03 Change 9mFY02 9mFY03 Change
    Insurance, banking & financial services 3,413 38.8% 3,614 37.7% 5.9% 7,021 36.5% 9,839 37.8% 40.1%
    Insurance 1,381 15.7% 1,352 14.1% -2.1% 3,193 16.6% 3,930 15.1% 23.1%
    Banking & financial services 2,032 23.1% 2,262 23.6% 11.3% 3,828 19.9% 5,908 22.7% 54.4%
    Manufacturing 1,504 17.1% 1,649 17.2% 9.6% 3,289 17.1% 4,425 17.0% 34.5%
    Retail 994 11.3% 1,122 11.7% 12.8% 2,327 12.1% 2,993 11.5% 28.6%
    Telecom 1,284 14.6% 1,390 14.5% 8.2% 3,020 15.7% 3,826 14.7% 26.7%
    Energy & Utilities 273 3.1% 249 2.6% -8.6% 404 2.1% 703 2.7% 74.0%
    Transportation & logistics 581 6.6% 633 6.6% 9.0% 481 2.5% 1,718 6.6% 257.2%
    Others 748 8.5% 930 9.7% 24.4% 2,693 14.0% 2,525 9.7% -6.2%
    Total 8,796 100.0% 9,586 100.0% 9.0% 19,235 100.0% 26,028 100.0% 35.3%

    A small decline in revenues from the insurance segment caused revenue contribution from the BFSI (banking, financial services and insurance) space to decline marginally. The company won a mandate to implement an ERP (enterprise resource planning) system for 'Swiss Re insurance Company' for its Asia Pacific and Middle East operations. Infosys also saw a strong growth in revenues from the telecom vertical. While the telecom equipment manufactures continue to be in a tough spot, focusing on telecom service providers might have helped the company post the strong growth in numbers. During the quarter, Infosys entered into a 3-year strategic sourcing contract with AT&T wireless. The company also bagged a development project for 2.5 G mobile phones from TTPCom. The strongest growth for 3QFY03 came from the retail sector. Recently, an economy incentive plan has been unveiled in the US. This is likely to benefit the financial, telecommunications and utilities sectors. Thus, if the business prospects of these sectors revive companies like Infosys could benefit considerably.

    At the current market price of Rs 4,471, the Infosys is trading at a P/E multiple 31x its FY03 estimated earnings. The selling that was seen today was partly due to unwinding of speculative positions built to take advantage of a favourable result and partly due to nervousness stemming from a steep decline in operating margins. However, if the company had not spent 1% of revenues on the aforesaid software, the results would have been in line with market expectations. The point we are trying to make is that there is a strong growth story in the making, the management is making all the right moves and finally, the company has Rs 14 bn in cash. This is almost 39% of Infosys' FY03 revenue guidance for the full year. Thus, at 1x market cap to sales, the company can add almost 39% to the topline through the inorganic route. However, at such high valuations we would like to reiterate that it is advisable to invest in Infosys from a long-term perspective (three to five years) rather than for a short term.

     

     

    Equitymaster requests your view! Post a comment on "Infosys: Keep faith!". Click here!

      
     

    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    INFOSYS LTD SHARE PRICE


    Aug 21, 2017 02:01 PM

    TRACK INFOSYS LTD

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

    INFOSYS LTD - TULIP TELECOM COMPARISON

    Compare Company With Charts

    COMPARE INFOSYS LTD WITH

    MARKET STATS