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Infosys: Beats the street, yet again - Views on News from Equitymaster
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Infosys: Beats the street, yet again
Jan 12, 2010

Performance summary
  • Net sales grow by 3% QoQ in 3QFY10 on the back of strong deal flow particularly in the banking and financial services vertical.
  • Operating margins expand by 0.9% QoQ to 35.5% during the quarter. These could have been even higher but for the impact of an appreciating rupee.
  • Net profits grow by 2.7% QoQ during 3QFY10. Growth slightly slower than that in sales owing to decline in other income and higher tax outgo.
  • Adds 4,429 employees (net) and 32 new clients during the quarter.
  • FY10 EPS guidance stands at around Rs 107 per share, an expected growth of 2.4% YoY.


Consolidated financial snapshot
(Rs m) 2QFY10 3QFY10 Change 9MFY09 9MFY10 Change
Sales 55,850 57,410 2.8% 160,580 167,980 4.6%
Expenditure 36,520 37,030 1.4% 107,540 109,590 1.9%
Operating profit (EBDITA) 19,330 20,380 5.4% 53,040 58,390 10.1%
Operating profit margin (%) 34.6% 35.5%   33.0% 34.8%  
Other income 2,360 2,300 -2.5% 2,210 7,350 232.6%
Depreciation 2,320 2,310 -0.4% 5,330 6,850 28.5%
Profit before tax 19,370 20,370 5.2% 49,920 58,890 18.0%
Tax 3,970 4,550 14.6% 6,170 12,400 101.0%
Profit after tax/(loss) 15,400 15,820 2.7% 43,750 46,490 6.3%
Net profit margin (%) 27.6% 27.6%   27.2% 27.7%  
No. of shares (m)       572.6 573.6  
Diluted earnings per share (Rs)*         109.2  
P/E ratio (x)*         23.5  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Infosys recorded a topline growth of 3% QoQ during 3QFY10. This was mainly aided by higher volumes (up 5% QoQ) coupled with an increase in billing rates. As regards volumes, while offshore volumes grew by 6.5% QoQ, onsite volumes grew 5% QoQ. Billing rates (in dollar terms) improved by 2% QoQ for onsite projects and 1% QoQ for offshore services. The management has indicated in the press release that the demand environment is improving and that offshore outsourcing is likely to benefit from the recovery. The company added 32 new clients during the quarter thus taking the total number of active clients to 568.

  • Among its service lines, Infosys recorded the strongest performance in ‘application development and maintenance' (which grew by 3% QoQ), followed by ‘testing services'. While the former recorded sales growth of 7% QoQ (while accounting for 42% of total sales), the latter grew sales by 8% QoQ (accounting for 7% of total sales). While these low-end services did well, performance remained muted for high-end services like consulting, package implementation and business process management.

  • Infosys' revenues from the North American market registered a 4% QoQ growth during the quarter. This was though slower than the 9% QoQ growth recorded in the rest of the world segment. Sales from Europe and India increased by 3% QoQ each during the quarter. Based on verticals, Infosys witnessed the strongest performance in the banking and financial services (BFS) vertical which contributed around 35% of its topline for the quarter. Revenue here grw by 6% QoQ. This was followed by manufacturing (19% of the revenue) and telecom (16% of the revenue) verticals. However, the retail and transport industries witnessed a 5% QoQ and 20% QoQ decline in sales.

    Revenue break-up
    Rs m 2QFY09 3QFY09
    By service offerings    
    Application development and maintenance 22,787 24,284
    Application development 10,109 10,219
    Application maintenance 12,678 14,065
    Business Process Management 3,463 3,387
    Consulting Services and Package Implementation 13,292 13,377
    Infrastructure Management 4,356 4,076
    Product Engineering Services 1,285 1,378
    System Integration 2,457 2,354
    Testing Services 3,463 3,732
    Others 2,457 2,583
    Total services 53,560 55,171
    Product revenues 2,290 2,239
    Total revenues 55,850 57,410
    By industry vertical    
    Insurance, Banking and Financial services 18,710 19,864
    Manufacturing 10,779 11,080
    Retail 7,875 7,521
    Telecom 9,048 9,300
    Utilities 3,295 3,502
    Transportation & Logistics 1,285 1,033
    Services 2,793 2,928
    Others 2,066 2,182
    By geography    
    North America 36,805 38,235
    Europe 12,957 13,319
    India 670 689
    Rest of world 5,417 5,913

  • Infosys added a net of 4,429 employees during 3QFY10. Its total headcount stood at 109,882 at the end of December 2009. The utilisation (excluding trainees) improved from 73.2% in 2QFY10 to 76.2% in 3QFY10. Attrition levels increased to 11.6 % during 3QFY10 as compared to 10.9% during the previous quarter.

  • Despite a 3.7% appreciation in the rupee against US dollar and increase in sales and marketing expense, Infosys' operating margins expanded by almost 1% QoQ during 3QFY10. This was largely aided higher utilisation levels and containment of general and administrative cost.

  • Infosys reported a 3% QoQ growth in its net profits during 3QFY10. This was a result of increased volumes and improved billing rates and operating margins.

What to expect?
At the current price of Rs 2,570, the stock is trading at a multiple of 16.5 times our estimated FY12 earnings. The company appears to be inching towards recovery as evident from its 3QFY10 performance and improved business activity in terms of deals and faster decision making. On its just concluded conference call, the management appeared particularly upbeat about exceeding the guidance for the current year. The company plans to hire around 6,000 people in 4QFY10 which might result in pushing the employee cost up. Further the company expects the overall tax rates to go higher in the coming quarters as profits increase at its non-STPI business units. The management expects IT budgets of clients to remain flat for 2010, which is perhaps good news as the downfall is contained. It expects an overall growth of 3.8% and 2.4% in revenues and EPS during FY10. However, fluctuating rupee remains a concern for the company.

The company believes that its strategy to invest in advance training, newer business models and newer markets during the downturn is enabling it to grow rapidly as the recovery has started to take shape. The company's focus on intellectual property, new business models of flexible pricing and operational control are helping it win more repeat business as well as new clients. It applied for 18 process patents in India and the US during 3QFY10, taking its total pending patent applications to 219. The company's performance was bolstered by improved performance from the its subsidiaries like Infosys BPO and Infosys Tech in China, Australia and Mexico. We maintain our latest view on the stock.

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