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Infosys FY08: Business as usual - Views on News from Equitymaster
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Infosys FY08: Business as usual
Apr 15, 2008

Performance summary
  • FY08 net sales grow by 20% YoY; higher by 1% as compared to our estimates. Growth stands at 6.3% QoQ for 4QFY08. In US dollar terms, revenue growth for the fiscal stands at 35% YoY.

  • EBITDA margins contract by 0.2% YoY during the fiscal.

  • Net profits grow by 21% YoY during FY08, 1.5% QoQ during 4QFY08. FY08 EPS higher by just around 1% as compared to our estimates.

  • Management estimates FY09 net sales and profits to grow by around 20% YoY and 15% YoY respectively.

  • Recommends final dividend of Rs 7.25 per share and special dividend of Rs 20 per share. Total dividend (including interim dividend of Rs 6 per share) recommended for FY08 thus stands at Rs 33.25 per share (dividend yield of 2.2%).

Consolidated financial snapshot
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 42,710 45,420 6.3% 138,930 166,920 20.1%
Expenditure 28,790 30,640 6.4% 95,020 114,540 20.5%
Operating profit (EBDITA) 13,920 14,780 6.2% 43,910 52,380 19.3%
Operating profit margin (%) 32.6% 32.5%   31.6% 31.4%  
Other income 1,580 1,390 -12.0% 3,720 7,040 89.2%
Provision for investments - -   20 -  
Depreciation 1,530 1,570 2.6% 5,140 5,980 16.3%
Profit before tax 13,970 14,600 4.5% 42,470 53,440 25.8%
Extraordinary items - -   60 -  
Tax 1,660 2,110 27.1% 3,860 6,850 77.5%
Minority interest - -   110 -  
Profit after tax/(loss) 12,310 12,490 1.5% 38,560 46,590 20.8%
Net profit margin (%) 28.8% 27.5%   27.8% 27.9%  
No. of shares (m)         573.3  
Diluted earnings per share (Rs)         81.3  
P/E ratio (x)         18.5  

What has driven performance in FY08?
  • The 20% YoY growth in Infosys’ FY08 net sales was due to a combination of higher volumes and better billing rates. As for volumes, these grew by 23% YoY and 30% YoY for onsite and offshore projects. Billing rates improved by 7% YoY for onsite projects and 6% YoY for offshore services. Infosys added 38 new clients during the fiscal (170 on a gross basis). This included addition of 1 client that will give the company US$ 300 m in annual revenues and 3 that will give it US$ 100 m in annual revenues. Importantly, the company increased the share of repeat business in its sales from 95.3% in FY07 to 97% in FY08, possibly removing many doubts about the offshoring momentum.

  • Based on service offerings, Infosys has recorded the strongest performance in the ‘consulting and package implementation’ service, followed by ‘application maintenance’ and ‘application development’. Robust performance of the consulting and development segments are particularly enthusing as it gives an indication that the company continues its move up the value chain and has seen no real slowdown in new development work. Based on revenue by industry it caters to, the company has seen the strongest traction in ‘telecom’ followed by ‘banking and financial services’ and ‘retail’.

     
    Note: Contribution to sales growth has been calculated by multiplying the share in revenues of respective segments with their FY08 growth rate. Cons., PI – Consulting & Package Implementation, Maint. – Application Maintenance, Deve. – Application Development, Others – Infrastructure Management, Products, Systems Integration and Testing

  • Infosys added a net of 18,900 employees during the fiscal, with around 2,500 joining its rolls in 4QFY08 (it had added 8,100 employees during 3QFY08). At the end of March 2008, the company’s total employee strength stood at almost 91,200, with 85,000 being software professionals and the remaining in sales and support functions. The utilisation (excluding trainees) was maintained at around 76% levels during the fiscal. It is also important to note that attrition levels dropped to 13.4 % during FY08 as compared to 13.7% during the previous fiscal.

  • Infosys’ operating margins recorded a small 0.2% YoY decline during FY08. The key reason for this decline was the rupee appreciation of 11.2% against the US dollar (when seen on the average currency rate that Infosys has used for its FY07 and FY08 conversions). However, a major impact on this account was averted owing to factors like higher utilisation levels, greater share of offshore revenues (that earn better margins as compared to onsite revenues), lower selling expenses (as percentage of sales) and improvement in employee productivity. The FY08 performance vindicated the management’s earlier expectation of maintaining margins at the FY07 levels (we had estimated operating margins at 30.8% for FY08).

  • Infosys reported a 21% YoY growth in its net profits during FY08. This growth was largely aided by an 89% YoY rise in other income, whish was a result of a sharp increase in the company’s interest income on deposits with banks, which increased by almost 250% YoY. As a matter of fact, Infosys has reported a cash and bank balance of almost Rs 70 bn (US$ 1.7 bn) at the end of March 2008, which has led to the spike in other income as discussed above. To reward shareholders out of this huge cash surplus, the company has declared a special dividend of Rs 20 per share for FY08 and has also increased its maximum dividend payout ratio to 30% of net profits effective FY09 (from 20% currently).

What to expect?
At the current price of Rs 1,520, the stock is trading at 13.5 times our estimated FY10 earnings, which we believe is really attractive. FY08 has been a challenging year for Infosys (as also for its peers in the technology sector), largely on account of increased global economic worries and currency volatility (rupee’s sharp rise against the US dollar). However, while the management has indicated of some short-term challenges on account of continued global economic uncertainties, it has maintained that there are significant growth opportunities in the medium to long term. It has indicated that while clients are seeing business restructuring and leadership changes and expect technology spending to slow down for the next two quarters, there are expectations of a pick up after that considering the leverage that offshore outsourcing provides them (the clients). The management has also indicated that it remains particular about pricing and margins and is not willing to compromise on the same to get more business. For FY09, it has guided for a 20% YoY and 15% YoY growth in sales and net profits respectively (for this, it has estimated billing rates to be stable). We shall soon update our research report on the company with FY08 actual numbers and also incorporate our FY11 estimates.

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