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Infosys: Present perfect, future tense - Views on News from Equitymaster
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Infosys: Present perfect, future tense
Jan 13, 2009

Performance summary
  • Net sales grow by 7% QoQ in 3QFY09, chiefly led by volumes as billing rates come under pressure.
  • Operating margins expand by 2% QoQ helped by rupee’s depreciation against the US dollar.
  • Net profits grow by 15% QoQ during the quarter aided by higher operating margins and tax reversal.
  • Adds 30 new clients and 2,800 employees (net) during the quarter.
  • Attrition has come down to 11.8% in the 3QFY09 from 12.8% in 2QFY09.
  • Management has maintained its sales and net profit guidance for FY09 in rupee terms. Revenue guidance in US dollar terms has however been revised downwards from 15.6%-17.6% earlier to 11.8%-12.8%%.


Consolidated financial snapshot
(Rs m) 2QFY09 3QFY09 Change 9MFY08 9MFY09 Change
Sales 54,180 57,860 6.8% 121,500 160,580 32.2%
Expenditure 36,240 37,550 3.6% 83,900 107,540 28.2%
Operating profit (EBDITA) 17,940 20,310 13.2% 37,600 53,040 41.1%
Operating profit margin (%) 33.1% 35.1%   30.9% 33.0%  
Other income 660 380 -42.4% 5,650 2,210 -60.9%
Depreciation 1,770 1,870 5.6% 4,410 5,330 20.9%
Profit before tax 16,830 18,820 11.8% 38,840 49,920 28.5%
Tax 2,510 2,410 -4.0% 4,740 6,170 30.2%
Profit after tax/(loss) 14,320 16,410 14.6% 34,100 43,750 28.3%
Net profit margin (%) 26.4% 28.4%   28.1% 27.2%  
No. of shares (m)       571.6 572.6  
Diluted earnings per share (Rs)*         98.2  
P/E ratio (x)*         11.7  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • Infosys recorded a topline growth of 7% QoQ during 3QFY09. This growth was mainly aided by higher volumes (grew 2% QoQ). However billing rates declined by 6%. As regards volumes, while offshore services volumes grew by 3% QoQ, those for onsite projects declined by 1% QoQ. Billing rates declined by 6% QoQ for onsite projects and 5% QoQ for offshore services. The management has indicated in the press release that the pressure on billing rates can intensify in the future given the pressure on demand. Infosys added 30 new clients during the quarter thus taking the total number of active clients to 583.

  • Among its service lines, Infosys recorded the strongest performance in ‘application development and maintenance’, followed by ‘consulting and package implementation’. While the former recorded sales growth of 6% QoQ (while accounting for 43% of total sales), the latter also grew sales by 6% QoQ (accounting for 25% of total sales).

  • In spite of ongoing financial crisis and economic slowdown in the US, Infosys registered 12% QoQ revenue growth in sales from North America and 3% QoQ growth in rest of the world. However, the company witnessed a decline in sales from the European region (by around 3% QoQ). Sales from India declined by 1% QoQ. Based on verticals, Infosys witnessed the strongest performance in the banking and financial services vertical (sales up 12% QoQ) followed by retail and utilities. The telecom vertical recorded a 6% QoQ decline in sales during the quarter.

  • Infosys added a net of 2,800 employees during 3QFY09. The company’s total headcount stood at 103,000 employees at the end of December 2008. The utilisation (excluding trainees) improved from 73.7% 2QFY09 to 74.5% in 3QFY09. Attrition levels dropped to 11.8 % during 3QFY09 as compared to 12.8% during the previous quarter. One can however safely assume that higher utilisation and lower attrition are purely due to the current environment and nothing to do with any conscious effort on the part of Infosys.

  • Infosys’ operating margins expanded by 2% QoQ during 3QFY09. This was largely aided by depreciation of rupee against the US dollar, higher utilisation levels and cost containment.

  • Infosys reported a 15% QoQ growth in its net profits during 3QFY09. This growth was a result of improved operating margins and tax reversal.

What to expect?
    At the current price of Rs 1,230 the stock is trading at a multiple of 8.7 times our estimated FY11 earnings. Infosys’ overall numbers for the nine-month period are in line of meeting our full year (FY09) estimates. The management has indicated that it is confident about achieving guidance revenue growth of 29% to 30% YoY (in rupee terms) during FY09. However, it has downgraded the dollar revenue guidance from 15.6%-17.6% earlier to 11.8%-12.8%%.

    Overall, in its just concluded conference call, the management sounded cautious on the current scenario. It indicated that going forward the company might face pressure from clients on the pricing front. While the management has indicated that the pricing environment seems manageable at this point, it might consider walking out of deals if these pressures were to intensify further.

    The management has also indicated that utilisation rates might fall going forward as the company has hired new employees and they will be productive once their training is completed. It has also said that it will be hiring 27,000 employees in FY09 (this is 2,000 more than earlier stated numbers).

    The management has hinted that by February or March 2009, it will have better visibility on the future. We maintain our positive view on the stock from a 2 to 3 years perspective.

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