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Infy 4QFY01: A curtain raiser

Apr 10, 2001

Infosys symbolizes the best of corporate India and as a consequence it has to live with unrealistic expectations. Of course these unrealistic expectations have in the past fetched absurd valuations too. Therefore, for the past few months when conflicting signals began to come out of the US economy Infosys became the focal point of all attention and was at the receiving end of all flak from the markets. The slightest of decisions by the management was interpreted as signs of the company’s growth slowing down due to the downturn in the US economy. The best was when Infosys did not visit B-School for Campus placements, which takes place in the fourth quarter every year, it was interpreted as the company not hiring because it was getting less business.

But almost as if in defiance, which has been Infosys' hallmark, the company declared that it was doubling it business from Aetna Inc., a leading health and related benefits organization, to 500 employees by the end of this year. The reason for Infosys’ success was that it has played a significant role in the fulfillment of Aetna's corporate goals and objectives, not just their IT goals.

Increasingly organisations are relying on information technology for efficient operations, improved delivery mechanism and of course qualified decision-making. But the paradox is that information technology gets more and more complex as it ability to deliver increases. Therefore, there is an increasing need for a partner who understands the technology and more importantly how the technology can help the organisation realize its mission and vision. Companies like Infosys go a step further, they can, not only provide the strategy but can deliver the solution too.

Particulars 1Q 2Q 3Q 4QE FY00 FY01E
OPM (excl. Other Inc.) 38.7% 39.5% 40.5% 41.0% 39.3% 40.9%
Tax / PBT 10.2% 10.3% 9.8% 10.0% 11.9% 10.1%
NPM 34.1% 34.5% 31.0% 33.2% 32.4% 33.1%
Cash FDEPS (Rs) 21 27 32 38 50 112
FDEPS (Rs) 18 23 27 31 42 94
P/E (x) FY01E           43

Old business acumen says that companies will cut costs in a downturn. But this can be affected in many ways like working closely with a vendor, reducing the number of vendors and decreasing the number of new projects. We have to understand at the end of the day IT is a support function and has to justify the value it can bring to the organisation. It is not an elixir.

But the question is will organisations like Infosys get a bigger share of the shrunk pie? One theory says that the share is so small that it will not be affected. The other says that to get the advantage of offshore delivery model clients will shift business offshore and this will result in increased business.The pessimists lobby was always convinced that there would be a negative impact.

Therefore, the uncertainty prevails and the best person to guide us is Mr. Narayana Murthy, after all he knows quite well to mind his business.

Particulars 1Q 2Q 3Q 4QE FY00 FY01E
Sales 28.2% 25.5% 20.4% 18.0% 73.4% 123.5%
Operating profit 31.0% 15.4% 23.3% 19.5% 71.9% 112.8%
Net profit 41.2% 27.0% 8.0% 26.4% 117.0% 127.8%

After the results in the 3QFY01 Infosys had stated that it has surveyed its clients and found the desire to shift more business offshore. We would like to believe that.

Infy also signed MoU with the government of Andhra Pradesh, to set up a software development campus in Hyderabad. The facility will in 3 years from now employ 1,300 software professionals. The investment by Infosys will be in the range of Rs 800 m. For its part, the Government of Andhra Pradesh has agreed to provide Infosys 30 acres of land in Manikonda village, Hyderabad. But is interesting to note that this facility will be located near the Indian School of Business (ISB) campus. Bottomline Infosys won’t have to go far to look for world-class talent.

As per another MoU, signed by the company, Infosys will set up a second software development campus at Hinjewadi, and in the first phase of the project, spread over 3 years, invest Rs 600 m in facilities to seat about 1,200 software professionals. In the second and third phases of the project, within 5 years from the date of the MoU, Infosys will invest a further Rs 600 m in facilities to accommodate an additional 1,500 software professionals. Infosys already has a development center at Pune Infotech Park, Hinjewadi seating over 1,200 software professionals.

These moves are certainly not of company that sees a bleak future.

In an effort to improve its delivery capabilities Infosys opened a global development centre in Canada. The Toronto Global Development Centre currently employs 60 IT professionals, and the company hopes to expand its base in the region in the coming year. During the quarter Infosys also opened branch office in Sharjah. Located in the Sharjah Airport International Free (SAIF) the branch office will help Infy to gain customers in the banking sector for e-enabling initiatives of the banks in the Middle East. The clients will be mainly for its enterprise e-banking platform.

The results for 4QFY01 are expected to be in line with those seen for the previous quarters but what everybody will be keenly waiting for is Mr. Murthy’s outlook for the future and the impact of US slowdown on the Indian IT companies.

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