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Infosys: Bettering expectations - Views on News from Equitymaster
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Infosys: Bettering expectations
Jul 10, 2009

Performance summary
  • Net sales decline by 3% QoQ in 1QFY10.
  • Operating margins marginally up by 0.6% QoQ on account of better cost containment measures. The rupee appreciation against the dollar had put some pressure on margins.
  • Net profits decline by 5.3% QoQ during the quarter.
  • Company has added 27 new clients and reduced 945 employees during the quarter; total headcount now stands at 1,03,905 employees.

Consolidated financial snapshot
(Rs m) 4QFY09 1QFY10 Change
Sales 56,350 54,720 -2.9%
Expenditure 37,440 36,040 -3.7%
Operating profit (EBDITA) 18,910 18,680 -1.2%
Operating profit margin (%) 33.6% 34.1%
Other income 2,520 2,690 6.7%
Depreciation 2,280 2,220 -2.6%
Profit before tax 19,150 19,150 0.0%
Tax 3,020 3,880 28.5%
Profit after tax/(loss) 16,130 15,270 -5.3%
Net profit margin (%) 28.6% 27.9%
No. of shares (m) 573.6
Diluted earnings per share (Rs)* 102.9
P/E ratio (x)* 16.7

What has driven performance in 1QFY10?
  • The 2.9% QoQ decline in Infosys’ 1QFY10 topline was due to a combination of sluggish demand and pricing pressure on account of the continuing impact of economic meltdown. On account of major clients cutting their discretionary IT spending, the company registered a slowdown in high-end IT services like consultancy, package implementation and infrastructure management. However, some traction was seen in the basic application development and maintenance segment, which grew by 1% QoQ during the quarter. There has been no significant change in the distribution of revenues based on industry verticals, with BFSI (banking, financial services, insurance) still contributing 33% to the company’s total revenue. The company added 27 new clients during the quarter.

    Revenue by industry vertical
    4QFY09 1QFY10
    Rs m % of total Rs m % of total Change
    Insurance, Banking and
    Financial services
    18,596 33.0% 18,058 33.0% -2.9%
    Manufacturing 11,721 20.8% 11,218 20.5% -4.3%
    Retail 7,607 13.5% 7,223 13.2% -5.1%
    Telecom 9,410 16.7% 9,248 16.9% -1.7%
    Utilities 3,325 5.9% 3,119 5.7% -6.2%
    Transportation & Logistics 1,296 2.3% 1,259 2.3% -2.9%
    ervices 2,818 5.0% 2,681 4.9% -4.8%
    Others 1,578 2.8% 1,915 3.5% 21.4%
    Total 56,350 100.0% 54,720 100.0% -2.9%

  • Infosys’ operating margins recorded a slight improvement of 0.6% QoQ during 1QFY10. This was on the back of efficient cost cutting measures undertaken by the company. The software development and sales and marketing expenses decreased on a sequential basis. This was aided by decrease in employee count. It is important to note that deferment of some investments helped the margins in outperforming the guidance of the previous quarter. However, the appreciation in rupee impacted the margin on account of some hedging positions.

    Cost breakup
    (Rs m) 4QFY09 1QFY10 Change (%)
    Development expenses 30450 29150 -4.3%
    % of sales 54% 53%
    S&M expenses 2700 2610 -3.3%
    % of sales 5% 5%
    G&A expenses 4290 4280 0%
    % of sales 8% 8%
    Total expenses 37440 36040 -3.7%
    % of sales 66% 66%

  • On the manpower front, Infosys reduced a net of 945 employees during 1QFY10. At the end of March 2009, the company’s total employee strength stood at almost 104,900. The utilisation (excluding trainees) was around 70.9% levels during the quarter which is slightly lower than 74.5%, registered in 4QFY09. The attrition rate was maintained at 11%, same as the last quarter.

  • Infosys reported a 5.3% QoQ decline in its net profits during 1QFY10. This was largely due to decreased realisation on account of pressure on billing rates and demand. The demand for the high-end value added IT-services like consulting etc declined.

What to expect?
At the current price of Rs 1,728, the stock is trading at a P/E of 14.6 times our estimated FY12 earnings. The management, in the recently concluded conference call, indicated that short-term outlook for global technology spending remains challenging and volatile. Also, as per the management, operating margins are expected to decline by 1.5% YoY during FY10 on account of new investments, ramp-up in sales and marketing effort and onsite hiring. In spite of the ongoing trouble in BFSI space in the US, the management expects growth to be intact going forward on account of strong pipeline of projects. The company is now having 330 million dollar clients as against 327 in the previous quarter. In 1QFY10, the company won a couple of very big high-end transformational deals along with a few multi-year multi-million dollar outsourcing projects. The company has managed to curb the sharp decline in volumes and expects the recovery to happen by mid-2010. Despite the decreased velocity of business, the management believes that IT is a growth business and is confident of weathering this temporary slowdown on grounds of company’s unique value proposition, robust customer relations and strong deal pipeline. We had recommended a ‘Buy’ on the stock in April this year. At the current levels, we have a ‘Hold’ view on the same.

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