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Infosys: Focused on diversification!

Mar 9, 2005

Infosys Technologies Limited is India's second-largest software services exporter, with annual revenues expected to reach over US$ 1.7 bn in FY05. The company has been at the forefront of the growth of the Indian IT sector over the past few years, outperforming (its peers and the sector) even when the times were not so ripe. The company's management is acclaimed for its corporate governance practices, and has been a source of competitive advantage in the company's rapid growth over the past few years. We take a look at the segmental break-up of the revenues of Infosys, in terms of verticals and geographies, and attempt to analyse the impact of these on the business of the company.

'Vertically' focused
Infosys serves a fairly wide variety of industry verticals, ranging from manufacturing, banking, financial services and insurance (BFSI), telecom, retail, energy and transportation. This base of verticals served by Infosys is a big positive for the company and its shareholders, as when there is a slowdown in any of the above industries, and technology spending in those industries is affected, Infosys will not get badly hit, since it is not dependent on just that one industry for business.

n FY03, Infosys reorganized its business units, and classified them along vertical lines, as opposed to geographic classification. This has enabled the company to focus on growing key verticals from which it derives its business. As can be observed from the table below, the majority of the revenues of Infosys are derived from the Banking, Financial Services and Insurance (BFSI) vertical. This is not surprising, as the global financial industry spends more on technology than any other industry.

The company has also made efforts to develop and grow its business in newer verticals like retail, transport and utilities. This is reflected in the increasing share of business from these verticals. It has also made efforts to improve solutions in the manufacturing vertical, particularly automotive and aerospace.

Infosys: 'Powered' by banking, 'driven' by diversification!
Industries FY01 FY02 FY03 FY04
Manufacturing 17.8% 17.1% 16.4% 14.8%
BFSI 33.7% 36.6% 37.6% 36.6%
B & FS 19.5% 20.4% 23.3% 23.7%
Insurance 14.2% 16.2% 14.3% 12.9%
Telecom 18.4% 15.6% 15.2% 16.6%
Retail 9.1% 12.4% 11.4% 11.6%
Energy & Utilities 1.4% 2.0% 2.9% 3.0%
Transportation 2.2% 2.7% 6.8% 7.1%
Others 17.4% 13.6% 9.7% 10.3%
TOTAL 100.0% 100.0% 100.0% 100.0%
* Banking, Financial Services and Insurance

Geographical breakup: US 'tilt'
Infosys is a global software services major in the true sense of the word. In fact, almost 100% of its revenues are export earnings! It provides software services in the US, Europe and Australia, apart from India. The lion's share of its revenues is derived from the US market, the world's largest market for IT services. This is understandable, since the market is huge. However, in the industry in which Infosys is operating, risk management is a very important aspect that needs to be addressed. A de-risked business model is extremely important for a software company to address geopolitical risks like 9/11, diversify into new regions, spread the revenue risks, increase business, and grow in scale and size, in the quest to become a truly global entity. In recent times, Infosys has set up a subsidiary in China, and made an acquisition by acquiring Expert Information Systems in Australia, a company providing consulting services to the telecom sector. This is in line with its strategy to de-risk its business model by venturing into new geographies.

Revenue break-up by geographies
FY01 FY02 FY03 FY04
North America 73.5% 71.2% 73.0% 71.2%
Europe 18.8% 19.5% 17.7% 19.2%
India 1.4% 2.0% 2.1% 1.4%
Rest of the world 6.3% 7.3% 7.2% 8.2%
Total 100.0% 100.0% 100.0% 100.0%

So, how does this fit into the final picture?
Given the growth expected in the global financial services industry, and with increasing competition and need for organisations to become 'leaner and meaner', we expect Infosys to continue showing growth in its key verticals. The focus shown by Infosys in recent times, of developing its business in verticals such as retail, transportation and manufacturing is also expected to stand the company in good stead, going forward. Infosys has also formed and maintained long-term relationships with most of its key clients, and as a result, its rate of 'repeat business' of 95% is among the highest in the industry. This provides better visibility of revenues, and given the outstanding execution capabilities of the company, the relationships are expected to be maintained and deepened, providing better opportunities for the company to offer a greater array of services to its clients, as and when they expand.

Infosys is also taking proactive steps to ensure a lower dependence on the US market for its revenues, as reflected by the setting up of a subsidiary in China, and the acquisition of Expert in Australia, in FY04. Taking into account these factors, Infosys continues to be among our top picks in the sector from a long-term perspective. However, expensive valuations for the medium term and the risks on account of managing growth as the company becomes larger in size are among the key risks.

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