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Infosys: Setting standards - Views on News from Equitymaster
 
 
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  • Jan 11, 2001

    Infosys: Setting standards

    Infosys 3QFY01 results are finally out. Infosys reported a jump (QoQ) in topline by 20% and the bottomline has gone by up 8% in 3QFY01. On a YoY basis the net profit has gone up by 143%(excluding other adjustments) and revenues by 136%. Including other adjustments the jump in net profit is 125%.

    Lets look deeper into Infosys’ figures. E-business comprised of 28.3% of the revenues (Rs 1,520 m). This is a growth of about 459% over revenues from e-commerce year to date (FY00). Obviously, this has been Infosys’ focus but surprisingly this quarter the growth over previous (2QFY01) was just 9%. The growth rate of e-business was bit of a disappointment as the industry itself is expected to grow very fast.

    The area that showed maximum growth (QoQ) was maintenance (growth of 37% QoQ). Almost all the areas have shown good growth rates. The sale of products grew by just 3% (QoQ), this could be due to the fact the all Infosys’ products are very comprehensive solutions (like Finacle) and require a huge financial commitment.

    Service offering (Rs m) 3QFY01 FY00 FY01 Change
        9 months 9 months  
    Development 42.6% 2,626 5,649 115.2%
    Maintenance, including Y2K 25.5% 1,815 3,280 80.7%
    Re-engineering 9.9% 635 1,205 89.7%
    Other services (including package implementation,
    consulting, testing & engineering services)
    19.7% 817 2,918 257.3%
    Products 2.3% 157 308 95.7%
    Total 100.0% 6,050 13,360  
    E-commerce 28.3% 678 3,789 459.1%

    The ‘other services’ area is Infosys’ unique selling point. It provides end-to-end solutions for companies, which includes consulting, solutions engineering, applications development, implementation and maintenance. The future leading revenue driver could surprisingly be maintenance along with e-commerce and development, due to a large demand in the mainframes industry.

    Where was the business from?
    If we look at the geographical break up of revenues, the market in which Infosys saw the largest growth was India (64%, QoQ). This is due to the miniscule market size. Growth rates were very strong for Europe and rest of the world. Considering the weight, even growth in the United Sates though lower (18%, QoQ) has been very good.

    On the home front the company saw addition of clients like ABN Amro Bank, IDBI Bank and Tamilnad Mercantile Bank. With the addition of IDBI five out of eight new private sector banks in India use Finacle. With consolidation in the financial services industry as seen last year, the IT imperative is for seamless solutions that can take care of banking, financial services and insurance. There is a huge market for systems integration. Infosys with its already existing clients, brand name and proven skill set will make hay, when the sun shines and that is not very distant in the future.

    This brings up the concern about the effect of the US economic slowdown. To cut costs companies will look for end-to-end solutions (consulting to maintenance) from a single vendor. Infosys is sufficiently equipped to meet this kind of a demand. Also, it can offer competitive rates compared to its counterparts in the west. But the deciding factor will be quality more than anything else. This happens to be Infosys’ focus. According to a survey by the company, most of the client expressed a desire to strengthen their relationship (read more business) with Infosys. As the clients concentrate on their core business they will look for partners like Infosys to take care of all their IT needs. It would not be very surprising, if Infosys in the near future enters into the ASP (application service provider) business.

    Who was the business from?
    The growth in revenues (30%, QoQ) from the financial services, banking and insurance segment fuelled Infosys’ strong growth. The new client additions in this segment were Providian, The Bank of Nova Scotia, Fairfax Financial Services and Suncorp Metway. For the manufacturing sector revenues the prize catch was Shclumberger.

    Industry 3QFY01 FY00 FY01 Change
        9 months 9 months  
    Insurance, Banking & Financial services 36.6% 1,688 4,511 167.3%
    Manufacturing 16.7% 1,500 2,383 58.8%
    Telecom 17.7% 883 2,477 180.4%
    Retailing 8.7% 702 1,111 58.3%
    Others (including Utilities, transportation
    & logistics and other services)
    20.3% 1,277 2,905 127.6%

    The highlight of the performance for this quarter was the thrust in the communications sector that will become a major component in Infosys’ revenues in the near future. However, the sector grew only buy 10%, QoQ. This is an area where Infosys faces stiff competition. The competitors include Wipro and Hughes Software. But on a 9 month basis the telecom software segment grew by 180%. All the Indian software companies are eying this lucrative vertical. A very interesting thing to note is that Infosys has an alliance with all the three majors: Cisco the leader in networking, Nortel a leader in communications & Internet and of course Lucent Technologies.

    However, QoQ, the maximum revenue growth is from retail industry. One possible reason could be retail sector is looking to cut logistics costs and reach out to a wider client base using e-commerce. For software companies the industry class mix has traditionally been quite volatile.

    Clients
      2QFY01 3QFY01
    Active Clients 240 250
    Added during quarter 27 26
    Revenue from top-5 clients 24.9% 28.1%
    Revenue from top-10 clients 38.0% 42.5%
    Clients accounting for >5% of revenue 2 3

    The exposure from dot-coms was reduced to 5.8% from 9.5% last quarter.

    The performance is excellent. Infosys at Rs 5,985 is trading at a P/E multiple of 67 time is nine months annualised earnings for FY01.

     

     

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