April 11th, 2001 when Infosys gave a guidance of 30% growth for FY02, it confirmed fears regarding the impact of the US economic slowdown on the software sector. And now the question is how bad can it get? An answer to this question will be sought or at least a pointer to the answer, as Infosys declares its results tomorrow.
The guidance that Infosys has given for 1QFY02 is a topline growth in the range of 3.2% - 5% sequentially (QoQ). The company is expecting an EPS (earnings per share) of between Rs 27 to 28 (not annualised). This translates to a NPM (net profit margin) in the range of 30.2% - 31.4%.
The most interesting thing to note would be how the operating margins move. In 4QFY01 inspite of a low topline growth the company had managed to improve operating margins by 40 basis points. This was due to the onsite offshore ratio shifting in favour of offshore development. As offshore development has better operating margins the figure improved.
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Throughout 1QFY02 software companies did not see much of a billing rate hike. However, the software firms have tried to maintain margins by increasing utilization (number of people in the bench could see a decline) and cutting costs. These companies have been cutting costs mainly on the employee front. Therefore, Infosys might see an improvement in operating margins.
There is a lot of room as the software sector traditionally had elevated pay scales compared to other industries, due to the shortage in manpower. The US economic downturn has affected the demand for software professional in the US and therefore, the bargaining power of the companies has increased. In other geographies too demand for professionals has not exactly met the very pleasing projections. For Germany that was to hire about 30,000 Indian professionals finally ended up hiring only 6,000 or so and that too mostly from East Europe.
Another interesting figure to watch would be the total number of clients Infy adds. In the last quarter inspite of the tough market environment, the company managed to add 37 new clients highest ever in FY01.In 1QFY02 Infy added The Burlington Northern and Santa Fe Railway Company (BNSF), the second largest rail network in North America, to its client list. Infosys would provide systems to improve operations and customer service to the company. Infosys dedicated team would grow to over 125 people during the next 18 months. The other major event for the quarter was the expansion of Infys relationship with Toshiba Corporation. Infy is to build the information infrastructure for Toshiba's global operations across many lines of business.
Infy continued to strengthen its presence in the banking sector. It announced a new engagement for BHF-BANK (Germany), IDBI Bank and Punjab National Bank. PNB announced its partnership with Infosys for deploying its Enterprise Banking E-platform - Finacle, BankAway and Bancsconnect. IDBI Bank successfully rolled over to "Finacle", for its total operations in the June quarter. Infy is consolidating in the Insurance sector too. The company will be designing, developing, implementing and deploying AMARTA™ (a business process environment and software framework designed specifically for the insurance industry by Sherwood International) for New York Life International Inc.
During the quarter Infosys made an investment of Rs 102 m (US$ 2.2 m) into a new venture name Workadia. The others that are involved in the venture are American Express, TIBCO and WestBridge Capital Partners. Workadia will provides companies with customizable business intranets using which companies will benefit in terms of substantial internal cost savings and improve employee productivity.
Other numbers that would give some clue about what to expect in the future would be the onsite offshore mix and the billing rates. However, most important would be the management’s future outlook. Considering the all these facts, there should not be any disappointments and the company will in all likelihood meet its earnings forecast.