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Infy’s got a flat - Views on News from Equitymaster
 
 
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  • Apr 11, 2001

    Infy’s got a flat

    Well, pessimist, rejoice! This day is yours. We have been totally taken aback by what Infosys has posted for the 4QFY01. There was no clue absolutely of what was to come. A deeper look into the results and we find the reasons for low growth.

    Taking a look at the revenue mix based on technology, the share of Internet and proprietary telecom has come down in the 4QFY01 compared to 3QFY01. While the contribution of Internet was 28% in 3QFY01 it has come down to 25%. The drop in revenues from the Internet domain is 4.6% sequentially. Similarly the revenues from the telecom domain have gone down by 4.7%. The area that has shown growth is the domain of CAD/CAM/CAE and embedded systems, which showed a jump of 43% compared to the previous quarter. However, the share of this domain is very small 11% in 4QFY01.

      3QFY01 4QFY01  
      % of revenues Rs m % of revenues Rs m Change
    Distributed Systems 46.1% 2,476 46.6% 2,618 5.8%
    Mainframe/Mid-range 13.2% 709 12.7% 714 0.7%
    Internet 28.3% 1,520 25.8% 1,450 -4.6%
    Proprietary Telecom 4.5% 242 4.1% 230 -4.7%
    Others (including CAD/CAM/CAE
    and embedded systems)
    7.9% 424 10.8% 607 43.0%

    If we take a look at the number from the industry verticals perspective, the disappointment has been mainly due to the revenues from the banking sector, which has shown a decline of 4% compared to 3QFY01. Banking sector is the heavy weight in Infosys’ portfolio with 33% of the business coming from this vertical. The vertical that has shown an impressive growth is retailing which has registered a sequential jump of 33% (11% of 4QFY01 revenues).

      3QFY01 4QFY01  
      % of revenues Rs m % of revenues Rs m Change
    Insurance, Banking & Financial Services 36.6% 1,966 33.6% 1,888 -4.0%
    Manufacturing 16.7% 897 17.9% 1,006 12.1%
    Telecom 17.7% 951 18.3% 1,028 8.2%
    Retailing 8.7% 467 11.1% 624 33.5%
    Others 20.3% 1,090 19.1% 1,073 -1.6%

    But the highlight of the performance is the 60 basis point improvement in operating margins the company has managed. This is probably due to the fact that the contribution of offshore revenues has gone up. The operating margins are greater for offshore business compared to onsite, as the employee costs for onsite business are significantly higher. The contribution from offshore projects was 69% (up from 66.7% in 3QFY01) for the 4QFY01. According to the company, further improvements in margins will continue as clients push business offshore. The increased contribution of offshore development has caused the blended billing rates for the company to decline.

    Infosys created a record of sorts for itself by adding 37 clients in the 4QFY01. Considering the grim economic environment in the US, client addition is noteworthy. The clients are from the financial services and manufacturing sector. The big names that have been added to its client list include Mosanto, Deutsche Investment Trust and Vodafone networks from Europe. From the US the new clients added include Dell and Siemens Energy & Automation Systems. From the Insurance sector Infosys has added to its client list Swiss Re, one of the worlds largest re-insurers.

    The revenues contribution from North America dropped from 73.6% in 3QFY01 to 71.6%. However, this was offset by a similar increase from Europe. The contribution from Europe was 18.6% in the third quarter of FY01. The revenues contribution from India and rest of the world also showed a marginal increase.

    The company continues to reduce its exposure to dot.coms and telecom start-ups. The contribution to revenues from dot.coms dropped from 5.8% in 3QFY01 to 4% in 4QFY01. The drop was of 50 basis points for telecom start-ups and the figure stood at 3% of 4QFY01 revenues.

    Infosys’ client concentration with regards to top five clients has come down to 26% from 28% in 3QFY01. However, the contribution to the revenues from top ten clients has gone up to 43% compared to 42% in the last quarter.

    The company continued to employ as strongly as before. It added 921 employees compared to a figure of 985 for the third quarter of FY01. The utilization rate for 4QFY01 have however gone down to 73% compared to 77% in 3QFY01.

    No doubt Infosys has not lived up to the surrealistic expectations that the markets had from the company. What surprised the markets was that the management gave no indication what so ever for such a low topline growth. The company did register a low sequential growth of 8% in revenues in 3QFY00.

    The company too has made a very smart move by lowering expectations and has projected a revenues and profits growth of just 30% and 33% respectively for FY02, which the company will probably beat.

     

     

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