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Infosys: Better times ahead

Apr 10, 2002

The FY03 guidance from Infosys of an 18% to 22% growth in revenues should be seen with a conservative eye. This is because the company saw revenues for FY02 grow by 37% as against a guidance of 30% given last year. The guidance of course, did not factor in the Sep 11 attacks, which undoubtedly impacted the numbers. Therefore, the performance in FY02 is that much more impressive.

QoQ Growth 1QFY02 2QFY02 3QFY02 4QFY02
Volume 10.90% 2.60% 3.40% 6.30%
Price (Billing rates) -2.80% 2.60% -3.20% -4.80%

Infosys’s 4QFY02 and FY02 results

After the initial decline in volume growth, the company saw volumes grow sequentially by 6%. The figure in the coming quarter is likely to be higher as the economic environment in the US improves. Global companies are likely to be more comfortable pushing work offshore. However, the key figure to watch will be movement of the billing rates. The sharp decline in 4QFY02 was the cascading effect of the pricing pressure witnessed all around the year. If the company manages to maintain 6% sequential growth in volumes for all the four quarters of FY03, the YoY growth in volumes will be about 26%. Thus, in the guidance given, the management seems to have factored in a 4% to 8% decline in billing rates for the next year. The management is confident of maintaining operating margins and expects bottomline growth to be lower on account of higher taxes for the next fiscal. In the recent union budget for FY03, the government has imposed a tax on 10% of the export earnings from software services.

Geography
Infosys has been gradually diluting its business concentration from the US. Infact, amongst all the geographies, the revenues from US showed the lowest growth (33%) for FY02. However, its will be quite sometime before the company manages to significantly reduce the concentration in revenues from the US. During the year, revenues from Europe grew by 42%, while rest of the world grew by 56%. The company’s growth in Europe is impressive, considering the fact that the European region too was witnessing initial signs of economic slowdown. Growth in revenues from India was the highest at 96%, which is on a very small base. Infosys earned Rs 521 m from India in FY02.

Service offerings
Maintenance, package implementation, re-engineering and engineering services showed strong growth during FY02. One of the most positive aspects of the result has been the strong 119% growth in products sales during the year. The company’s banking product Finacle has matured and is gaining popularity. Infosys is likely to continue witnessing robust growth from product related sales. This would result in improved operating margins, as margins in the product business are relatively much higher vis-à-vis the services business. In 4QFY02 Infosys acquired a product called SimpleRM to add CRM (customer relationship management) features to its banking product.

Service offerings 3QFY02 4QFY02 Change FY01 FY02 Change
Development 31.7% 31.6% 2.6% 40.0% 32.0% 9.6%
Maintenance 28.2% 29.8% 8.8% 25.4% 29.0% 56.4%
Re-engineering 10.6% 7.8% -24.3% 9.3% 10.1% 48.8%
Package implementation 10.6% 11.0% 6.8% 7.2% 9.8% 86.5%
Consulting 3.7% 3.8% 5.7% 4.9% 4.2% 17.4%
Testing 2.7% 2.9% 10.5% 2.9% 2.9% 37.0%
Engineering services 2.9% 2.8% -0.6% 1.7% 2.6% 109.5%
Other services 5.5% 5.6% 4.8% 6.1% 5.4% 21.3%
Total services 95.9% 95.3% 2.3% 97.5% 96.0% 34.9%
Products 4.1% 4.7% 18.0% 2.5% 4.0% 119.2%
Total revenues 100.0% 100.0% 2.9% 100.0% 100.0% 37.0%
             
Internet / E-commerce related 23.1% 22.4% -0.2% 28.4% 23.0% 10.9%

The area that showed subdued growth was development that has the largest share of revenues amongst service offerings and consulting. Infosys is gradually establishing its presence it the IT consulting domain. However, it will take sometime for the company to create a strong hold as the domain traditionally has been the forte of large consulting firms and IT services companies in the west. However, in FY03, the demand for development services is likely to see an improvement. In wake of the economic slowdown in FY02, companies were focused on keeping existing systems running. With improvement in the US economy, development services are likely to see renewed interest.

Industry verticals
The most dominant industry vertical BFSI (Banking, financial services and insurance) showed a steep sequential growth in revenues during 4QFY02. In 3QFY02 revenues from BFSI services had declined, as the corporates from this vertical were the hit post the tragic Sep 11 attacks on the world trade centre. The growth in banking and financial services was exceedingly strong. The revenues from the insurance vertical too recorded growth, compared to a decline in 3QFY02. Another positive was the sequential rise in revenues from telecom segment. While equipment manufacturers like Cisco, Nortel and Lucent continue to be in trouble, the growth in revenues is stemming from business outsourced by service providers.

Industry verticals 3QFY02 4QFY02 Change FY01 FY02 Change
Manufacturing 15.9% 17.2% 11.3% 17.8% 17.1% 31.6%
Insurance, banking & financial services 34.2% 37.3% 12.3% 33.7% 36.7% 49.2%
Insurance 15.7% 15.5% 1.6% 14.2% 16.3% 57.2%
Banking & financial services 18.5% 21.8% 21.3% 19.5% 20.4% 43.3%
Telecom 15.1% 15.4% 5.0% 18.4% 15.6% 16.1%
Retail 13.6% 12.9% -2.4% 9.1% 12.3% 85.2%
Energy & Utilities 2.7% 1.5% -42.8% 1.4% 2.0% 95.7%
Transportation & logistics 2.3% 3.4% 52.1% 2.2% 2.7% 68.1%
Others 16.2% 12.3% -21.9% 17.4% 13.6% 7.1%
Total 100.0% 100.0% 2.9% 100.0% 100.0% 37.0%

While the numbers point to a general improvement in business environment, the silver lining is that Infosys has entered into the IT outsourcing space, which could add significant pace to Infosys revenues in future.

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