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Infosys: No ‘surprises’ here - Views on News from Equitymaster
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Infosys: No ‘surprises’ here
Jul 11, 2008

Performance summary
  • Net sales grow by 7% QoQ in 1QFY09.
  • Operating margins contract by 2% QoQ on account of higher salary and visa costs. The pressure has although been offset to some extent by rupee’s depreciation against the US dollar.

  • Net profits grow by 4% QoQ during the quarter.

  • Company adds 49 new clients and 3,192 employees during the quarter; total headcount now stands at 94,379 employees.

  • Management estimates FY09 net sales and profits to grow by around 29% YoY and 23% YoY respectively, markedly higher than estimates of 20% and 15% respectively indicated at the end of previous quarter.

Consolidated financial snapshot
(Rs m) 4QFY08 1QFY09 Change
Sales 45,420 48,540 6.9%
Expenditure 30,640 33,750 10.2%
Operating profit (EBDITA) 14,780 14,790 0.1%
Operating profit margin (%) 32.5% 30.5%  
Other income 1,390 1,170 -15.8%
Depreciation 1,570 1,690 7.6%
Profit before tax 14,600 14,270 -2.3%
Tax 2,110 1,250 -40.8%
Profit after tax/(loss) 12,490 13,020 4.2%
Net profit margin (%) 27.5% 26.8%  
No. of shares (m) 573.3 573.6  
Diluted earnings per share (Rs)*   85.1  
P/E ratio (x)*   21.2  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • The 6.9% QoQ growth in Infosys’ 1QFY09 net sales was due to a combination of higher volumes and stable billing rates, which is in line with what the management has indicated in the past quarters’ conference calls. Based on service offerings, the company recorded the strongest performance in ‘infrastructure management’ followed by ‘product engineering’, ‘business process management’ and ‘systems integration’. Good performance in infrastructure management and consulting and development segments gives an indication that the company continues its move up the software value chain, delivering more of high end services to clients. Based on revenue by industry it caters to, the company has seen strongest growth in ‘manufacturing’, where sales grew 19% QoQ. Out of 49 new clients added during the quarter, 20 clients were in the manufacturing segment i.e., approximately 40% of new client addition. Importantly, business from the ‘banking and financial services’ segment continues to grow despite all concerns regarding the financial sector slowdown in the US.

    Revenue by industry vertical
      4QFY08 1QFY09  
      Rs m % of total Rs m % of total Change
    Insurance, Banking and Financial services 15,397 33.9% 16,746 34.5% 8.8%
    Manufacturing 7,449 16.4% 8,834 18.2% 18.6%
    Retail 5,405 11.9% 5,922 12.2% 9.6%
    Telecom 10,220 22.5% 9,562 19.7% -6.4%
    Utilities 2,362 5.2% 2,621 5.4% 11.0%
    Transportation & Logistics 1,272 2.8% 1,165 2.4% -8.4%
    Services 2,498 5.5% 2,670 5.5% 6.9%
    Others 818 1.8% 922 1.9% 12.8%
    Total   100.0% 48,540 100.0%  

  • On the manpower front, Infosys added a net of 3,192 employees during 1QFY09. At the end of June 2008, the company’s total employee strength stood at almost 94,500. The utilisation (excluding trainees) was maintained at around 72.2% levels during the quarter. However, what is concerning is that attrition levels have increased to 13.6% during the quarter, from 13.4% in previous quarter.

  • Infosys’ operating margins recorded a decline of 2% QoQ during 1QFY09. Margins for the quarter were impacted due to increases in salary and visa costs. However, the depreciation in rupee aided the company in offsetting this cost to some extent.

  • Infosys reported a 4 % QoQ growth in its net profits during 1QFY09. This growth was largely aided by a 41% QoQ decline in tax expense.

What to expect?
At the current price of Rs 1,765, the stock is trading at a multiple of 12.3 times our estimated FY11 earnings. The company has revised its guidance upwards and expects its income to grow in a range of 27.5% to 29.5% in FY09. The company also expects its earnings per share (EPS) to be in a range of Rs 99 and Rs 101 in the current fiscal. These estimates are markedly higher than what the company had outlined at the start of the fiscal (in April 2008).

In spite of ongoing trouble in BFSI sector in the US, the management expects growth to be intact going forward on account of strong pipeline of projects. The company is now having 325 million dollar clients as against 310 million dollar clients in the previous quarter. The company has managed to maintain pricing and expects it to be stable in the near future. However, it has witnessed sporadic pricing pressure from clients though the management is confident to bargain premium pricing on account of higher value proposition offered.

Importantly, Infosys’ top client revenue has come down from 10.3% last quarter to 7.9% this quarter. This is mainly because it lost business from a major client in Europe in the telecom sector. The management has commented on the issue and clarified this does not confirmed any kind of trend.

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