As Infosys declares its results tomorrow, markets will be eagerly looking for anything that could suggest initial signs of a recovery in the company’s business environment. The technology sector in India is going through a rough patch due to a slowdown in the US economy. The US with a lion’s share of 62% of the total exports from India is the most dominant geography for most of the software companies.
Recent reports from various quarters indicate increasing client visits and software companies strengthening employee intake. Thus, expectations are that there might be some evidence of an improvement in the business environment in the company’s numbers.
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As far as the company’s outlook is concerned, it expects the IT budgets globally to decline by 5% to 8% during the year. Consequently, it has indicated a 22% growth in topline and 18% growth in bottomline for FY03. The revenues for first quarter of FY03 (1QFY03) are expected to grow by about 0.6% on QoQ basis (12% on a YoY basis). The net profits in 1QFY02 expected to show a marginal decline of 2.6% QoQ but grow by 8% on a YoY basis. The decline net profits are on account of an increase in staff costs as the company’s annual salary hike comes into effect during the first quarter. This implies that the company will have to achieve a 25% growth in topline and a 20% growth in profits in remaining nine months to meet its guidance.
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During 1QFY03, the company took a number of steps towards boosting topline growth. Among them is the launch of its business process management (BPM) subsidiary and acquisition of Trade IQ in the banking group, were the most prominent.
Infosys announced the formation of Progeon, its BPM venture in April. Citigroup Investments has invested US$ 20 m (Rs 980 m) in Progeon for a stake, which is estimated to be 20% according to industry sources. Progeon also bagged its first contract during the quarter from GreenPoint Mortgage, US. The company’s banking group acquired Trade IQ, product division of IQ Financial Systems Inc that is based in the US. Acquisition was made to strengthen the company’s banking group and the group will now be able offer a product for the wholesale and investment banking segment. The size of the acquisition was estimated to be US$ 3.9 m (Rs 191 m) by almost all leading financial newspapers.
The company took several steps to boost organic growth also, which included acquisition of AUOTLAY, a software product and a tie up with Concours Group, a strategy-consulting firm. AUTOLAY is a 3-D software used in design development of components made from composite materials. With the increasing use of composite materials increasing in the aerospace and auto industries, Infosys hopes to cater to the resultant increase in demand. The company hopes to strengthen its presence in the consulting domain from the tie up with Concours Group. The two companies combined plan to provide consulting services and help companies leverage on technology.
Thus, the company has taken concrete steps to ensure future growth during the quarter. While near term prospects continue to be uncertain, the company took concrete steps during the quarter, to ensure future growth. However, even brilliant performers like Infosys have their own set of problems. The company has a problem of plenty (Read more), which it needs to address. At the current market price of Rs 3,427 the stock trades at a P/E multiple of 24x its FY03 estimated earnings.
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