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Infosys: What is important? - Views on News from Equitymaster
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  • Apr 12, 2004

    Infosys: What is important?

    For some in the stock market, tomorrow is the d-day, as Infosys is expected to announce its full year results. This is expected to set the tone for the year ahead when it comes to technology stocks. And for some, this would be yet another confirmation day!

    Amidst speculation about what Infosys will provide as guidance for both topline and net profit for the fiscal year 2005, we take a step back and access in brief the long-term prospects of the industry in general and Infosys is particular.

    To start of with, the long-term prospects of the Indian software industry remains promising for two fundamental reasons. One, we have skilled English speaking manpower in abundance and as year passes by, the pool is only increasing. And secondly, the cost of manpower is lower compared to global standards, even after the kind of raises that we have seen in the software sector. Therefore, the pillars of the Indian software sector are on a strong footing. The most important question however, is who will benefit the most from this trend?

    This is a very tricky question and to get an answer, history is a good starting point. Among all the software companies (listed), Infosys, Wipro and Satyam are considered the top-rung companies. There are also companies like Hughes Software, Geometric and i-flex that specialize in niche areas. Among these, Infosys has proved time and again that it has the management depth and scalability in its operations. These two are also very vital factors for long-term investors because technology is a vibrant sector and a visionary management at the top is of significance. Considering the rapid pace of employee additions and a geographically spread presence, scalability is another critical factor. Infosys scores high compared to its competitors.

    So, having looked the fundamentals in brief, what should one look for in Infosys' results?

    1. Till now, the growth in revenues for Infosys has largely come from increasing the head count (estimated at 23,000). If one maps the number of employees and revenue growth over the last five years, there is a strong co-relation. So, investors have to watch out what Infosys has to say on this front.

    2. At the same time, revenue per employee for Infosys has also increased in the last ten years from Rs 0.5 m to Rs 2 m. We believe this is where the crux lies. If the recent announcement of setting up of a separate consulting company is any indication, we are looking at revenue per employee growing at a faster rate than employee addition in the future. This means that the company is gradually moving up into high value-add services. So, retail investors have to keep a close eye on what the company has to say about this factor.

    While billing rates, onsite-offshore mix and so on may be of importance, we suggest investors to focus on these two factors i.e. pace of employee addition and possibility of high revenue per employee. Whether Infosys gives 20% or 30% topline growth guidance for FY05 is not as important, in our view. Yes, there may be disappointments in the short-term. But if you are a long-term investor, ascertain the growth prospects of the sector and the company from a fundamental perspective and then take your investment decision. Ultimately, there is a price to be paid for the quality of the management.



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    Aug 21, 2017 12:41 PM