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Infosys: Staring at a weak FY10 - Views on News from Equitymaster
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Infosys: Staring at a weak FY10
Apr 15, 2009

Performance summary
  • Net sales grow by 30% YoY in FY09, chiefly led by volumes growth; higher by 1% as compared to our estimates. However, sales declines by 2.6% QoQ during 4QFY09.
  • Operating margins expand by 2% YoY during the fiscal mainly on account of rupee’s depreciation against the US dollar.
  • Net profits grow by 29% YoY during FY09 aided by higher operating margins and tax reversal.
  • Adds 37 new clients and 1,772 employees (net) during the fourth quarter.
  • Board recommends dividend of Rs 13.5 per share (dividend yield of 1%)
  • The company has announced an earnings guidance of Rs 96.7 to Rs 101.2 per share for FY10, lower by 3% to 7% YoY as compared to FY09 EPS.


Consolidated financial snapshot
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Sales 57,860 56,350 -2.6% 166,920 216,930 30.0%
Expenditure 37,550   37,440 -0.3% 114,540 144,980 26.6%
Operating profit (EBDITA) 20,310 18,910 -6.9% 52,380 71,950 37.4%
Operating profit margin (%) 35.1% 33.6% 31.4% 33.2%
Other income 380 2,520 563.2% 7,040 4,730 -32.8%
Depreciation 1,870 2,280 21.9% 5,980 7,610 27.3%
Profit before tax 18,820 19,150 1.8% 53,440 69,070 29.2%
Tax 2,410 3,020 25.3% 6,850 9,190 34.2%
Profit after tax/(loss) 16,410 16,130 -1.7% 46,590 59,880 28.5%
Net profit margin (%) 28.4% 28.6% 27.9% 27.6%
No. of shares (m) 572.0 572.9
Diluted earnings per share (Rs) 104.5 -7%
P/E ratio (x) 12.7 -3%
* On a trailing 12-months basis

What has driven performance in 4QFY09?
  • Infosys recorded a topline growth of 30% YoY during FY09. However, sales declined by 2.6% QoQ during 4QFY09. As regards volumes, while those for offshore services declined by 1.3% QoQ, those for onsite projects declined by 1.5% QoQ. Billing rates declined by 4% QoQ for onsite projects and 2% QoQ for offshore services. The management has indicated in its conference call that pressure on billing rates will continue in FY10 as well. Infosys added 37 new clients during the quarter thus taking the total number of active clients to 579.

  • Among its service lines, Infosys recorded the strongest performance in ‘product engineering services’ followed by ‘infrastructure management’ and ‘consulting services and package implementation’. While the former recorded sales growth of 21% QoQ (accounting for 3% of total sales), the latter also grew sales by 5% QoQ and 2.5% QoQ respectively (accounting for 7% and 6% of total sales respectively).

  • Amidst the ongoing financial crisis and economic slowdown in the US, Infosys registered 10% QoQ revenue growth in sales from the domestic market. However, the company witnessed a decline in sales from the European region (by around 3% QoQ) and North America (by around 2% QoQ). Based on verticals, the company witnessed the strongest performance in the manufacturing vertical (sales up 3.4% QoQ) followed by retail. However, the banking and financial service vertical which contributes almost 33% of total revenue registered a 8% QoQ decline during the quarter.

  • Infosys added a net of 1,772 employees during 4QFY09. The company’s total headcount stood at 105,000 employees at the end of March 2009. The utilisation (excluding trainees) remained stable at 74.5% during 4QFY09 as against the previous quarter. Attrition levels dropped to 11.1% during the fourth quarter as compared to 11.8% during 3QFY09. The management has indicated in its conference call that acceptance of job offers in campuses have increased significantly (almost 80%) which has resulted into higher hiring.

  • Infosys’ operating margins expanded by 2% YoY during FY09. This was largely aided by depreciation of rupee against the US dollar and cost containment. The management has indicated that going forward the company will continue its cost control measures. The company is not going to hike salary of its staff in April this time around. Also, the company will apply for lesser number of visas.

  • Infosys reported a 29% YoY growth in its net profits during FY09. This growth was a result of improved operating margins and tax reversal. However, the company registered 1.7% decline in profits on a sequential basis.

What to expect?
At the current price of Rs 1,370 the stock is trading at a multiple of 11.4 times our estimated FY11 earnings. Infosys’ overall numbers for FY09 are in line with our estimates. However, given that the management has estimated 3% to 7% lower earnings in FY10 as compared to FY09, we would also have to revise downwards our estimates for the company.

The management sounded cautious about the current scenario in its conference call. It indicated that going forward the company will continue to face pressure on the pricing front. However, it indicated that it does not see significant pricing decline from the current level. We maintain our positive view on the stock from a 2 to 3 years perspective.

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