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Infosys: It's Bangalore Vs Mumbai, again! - Views on News from Equitymaster

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Infosys: It's Bangalore Vs Mumbai, again!
Apr 12, 2007

The expectations game has begun, yet again! With Infosys slated to announce its full year FY07 numbers this Friday, the 13th (considered an ominous day), newspaper and television channels have been pumping up reports after reports as to what can be expected of the company in 4QFY07 and, over that, what kind of 'guidance' will the management provide for FY08. But would that despair Infosys' management into thinking what will happen to the company's stock post the result announcement and the consequent mood on the streets? Certainly not! The management team at Infosys will carry on its job of building one of the leading software companies in the world. While it will still be wondering how to stop the departure of quality people from its aisles into that of competitors and at the same time continue to meet clients expectations, it still won't be wondering about whether it is able to meet the “street's” expectation or not! And then, how do you expect a stock, with a weight of less than 7% on the benchmark index (Sensex) to “lead the market” to the next level – up or down?

The rupee appreciation against the US dollar during the past few months seems to be weighing the most on expert opinions about Infosys' FY08 guidance. While there is a valid argument to support this concern (considering that every 1% appreciation of the rupee against the US dollar negatively impacts IT companies' operating margins by 0.3%), it is pertinent to note that there are other positive factors that shall continue to negate this impact of a stronger rupee on Infosys' profitability.

Factors like rising revenue productivity, leverage from sales & marketing overheads and higher billing rates for value-added services are what the company is focusing on to sustain strong profitability over the long term. We, however, continue to believe that hiring and maintaining attrition of right kind of talent will be the biggest challenge for a people-driven company like Infosys, even as it moves aggressively to capture a larger share of the global IT offshoring pie.

Read our view on Infosys
Read our view on software stocks

While the company's result announcement tomorrow will definitely serve you as a way of taking stock of the entire situation (it being a full year result), it should by no means be a barometer for your long-term investment decision with respect to the stock. We maintain our positive view on the company as it tries to consolidate its position as the market leader, builds up scale and competitive advantages, and continuously moves up the value chain.

We believe that, you, as a long-term investor and an 'owner' of a part of Infosys need to worry more about what is happening at Electronics City, Bangalore (Infosys' headquarters) rather than what is boiling at Dalal Street, Mumbai!

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