Infosys has reported a strong 12% growth in revenues and a 3.2% rise in net profits for 1QFY03, on a sequential (QoQ) basis, consequently, beating market expectations by a wide margin. Infact the markets were expecting a 13% growth in revenues on a YoY basis. The company has managed the growth in a single quarter. The topline growth on a YoY basis, works out to be significant 25% and the growth in net profits is 14%.
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The topline growth was on the back of a robust 12.5% sequential growth in volumes. This was the highest sequential growth in volumes in the past five quarter. This could indicate that prospects of companies like Infosys improving. The decline in billing rates was 0.6%. This was significantly lower compared to the decline seen in the previous quarter. The deceleration in the fall of billing rates could point to prices bottoming out. However, it is unlikely that the Indian software companies will be able to negotiate rate hikes in the near future. The billing rates in the best case are likely to remain stagnant.
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The steep growth in topline has not been reflected in bottomline growth due to a sharp decline in operating margins. The operating margins in the first quarter of every fiscal are usually lower compared to the other quarters, as the company effects its pay hikes during this period. The staff costs have grown by 20% sequentially increasing from 43% of the revenues in 4QFY02 to 46% in 1QFY03. The decline in operating margins for 1QFY03, however, has been significantly higher than declines seen in the past. The company in an effort to create a significant presence in global markets has significantly increased its marketing efforts. Consequently, the selling and general expenses grew by a significant 54% sequentially. The selling and marketing expenses as a percentage of revenues increased from 5.3% to 7.2%.
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The company added 23 new clients during the quarter taking the total number of active clients to 306 up from 293 in 4QFY02. The number of new clients added in 1QFY03 was lower than 29 clients added in 4QFY02. The list of clients added during the quarter include Bear and Sterns, a securities firm in the US and ZKB, an asset management institution in Switzerland.
On the back of the strong performance, the company has edged up its topline guidance for the year. The company now expects the topline growth to be in the range of 19% -23% as compared to a guidance of 18% - 22% given earlier. The guidance for growth in bottomline has also been moved up. The bottomline is expected to grow in the range 16% - 20% as compared to 15% - 19% projected earlier.
The company once again has projected a flat outlook for 2QFY03. The revenues are expected to grow by 2% sequentially and the net profits are expected to rise by between 1% to 4% sequentially. Thus, going forward the company expects an improvement in margins.
At the current market price of Rs 3,426, the stock is trading at a P/E multiple of 26x its 1QFY03 annualised earnings.
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