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Infosys: Meets guidance

Apr 10, 2003

Infosys has posted a 1% sequential growth in net profits for 4QFY03. This is line with the guidance given by the company but below market expectations. However, on the revenue front the company has beaten its own guidance and managed to meet market expectations with a 6% sequential growth.

(Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
Sales 9,586 10,199 6.4% 26,036 36,227 39.1%
Other Income 298 274 -8.1% 664 996 50.0%
Expenditure 6,252 6,795 8.7% 15,660 23,507 50.1%
Operating Profit (EBDIT) 3,335 3,404 2.1% 10,376 12,720 22.6%
Operating Profit Margin (%) 34.8% 33.4%   39.9% 35.1%  
Interest - -        
Depreciation 495 528 6.6% 1,607 1,890 17.6%
Profit before Tax 3,138 3,150 0.4% 9,434 11,827 25.4%
Extra-ordinary income/(expense) - -   - (238)  
Tax 575 560 -2.6% 1,354 2,010 48.4%
Profit after Tax/(Loss) 2,563 2,590 1.0% 8,080 9,579 18.6%
Net profit margin (%) 26.7% 25.4%   31.0% 26.4%  
Diluted number of shares 66.2 66.2   66.2 66.2  
Diluted Earnings per share* 154.9 156.5   122.0 144.7  
P/E (x)   22.6     24.4  
*(annualised)            

The topline growth for 4QFY03 was on the back of a strong 13% growth in volumes. This is an indication of the company’s resilience. The volume growth posted was highest in the last eight quarters. This is during a time when businesses are facing a tough environment due to a war in Iraq. While margins were lower compared to 3QFY03, the fall was marginal. The company added 28 new clients during the quarter.

QoQ Growth 1QFY02 2QFY02 3QFY02 4QFY02 1QFY03 2QFY03 3QFY03 4QFY03
Volume 10.9% 2.6% 3.4% 6.3% 12.5% 11.7% 10.5% 12.8%
Price (Billing rates) -2.8% 2.6% -3.2% -4.8% -0.6% 4.40% -0.9% -5.1%

The company has given a EPS guidance of Rs 161 to 163 for FY04. This translates to a growth of 11%-12%. This is much below market expectations of an earnings guidance of 20% growth. The management seems to have adopted a conservative stance considering the fluid geo-political environments and the state of the US economy. The topline is expected to grow between 22% to 24% in FY04. The guidance therefore, indicates that the company expects the margin pressure to continue. However, it must be also noted that a conservative guidance gives Infosys a room for discretionary spending that is required to tap future growth prospects.

At the current market price of Rs 3,535 the stock is trading at a P/E multiple of 22x its FY04 earnings guidance. The selling seen is due to those taking a position for the short term exiting. However, we continue to be optimistic about the company’s future growth prospects. Therefore, investors who wish to invest for the long term could take advantage of the frenzied selling to enter the stock, which is available at attractive valuations.

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