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Infosys: Weak first qtr, expects a better year
Jul 13, 2010

IT services major Infosys has announced its 1QFY11 results. The company has reported a 4% QoQ growth in its sales while net profits have declined by 7% QoQ. Here is our analysis of the results.

Performance summary
  • Sales grow by 4% QoQ during 1QFY11.
  • Operating margins decline to 28.3% during the quarter, from 30.1% in 1QFY10. This is largely due to the impact of higher staff costs.
  • Weaker operating margins and a decline in other income leads to the net profits falling by 7% QoQ during the quarter.
  • Despite the weak profit performance during 1QFY11, the management has raised its FY11 earnings guidance. It now expects FY11 earnings per share to be in the range of Rs 112-116, as compared to its previous estimates of Rs 107-112. Revenue estimates have also been increased. The company now expects to grow its FY11 sales by 16-18% YoY as compared to the earlier estimates of 9-11% YoY.
  • The company added 38 new clients during the quarter taking the total number of active clients to 590.


Financial performance snapshot
(Rs m) 4QFY10 1QFY11 Change
Sales 59,440 61,980 4.3%
Expenditure 41,550 44,430 6.9%
Operating profit (EBDITA) 17,890 17,550 -1.9%
Operating profit margin (%) 30.1% 28.3%  
Other income 2,520 2,390 -5.2%
Profit before tax 20,410 19,940 -2.3%
Tax 4,410 5,060 14.7%
Profit after tax/(loss) 16,000 14,880 -7.0%
Net profit margin (%) 26.9% 24.0%  
No. of shares 573.9 573.9  
Diluted earnings per share (Rs)*   107.7  
P/E ratio (x)*   26.2  
* On a trailing 12-months basis
Note: Depreciation figures have not been disclosed separately
and hence these are included in operating expenses to calculate EBDITA margins

What has driven performance in 1QFY11?
  • The 4% QoQ growth in Infosys’s 1QFY11 sales was largely helped by the company’s bread and butter business of ‘application development and maintenance’. This segment, which forms around 41% of the company’s total sales, grew by 7% QoQ during the quarter. As for the other key segment of ‘consulting & package implementation’ (25% of total sales), sales were flat.

  • Based on the industries it serves, Infosys recorded the best performance from the BFSI space (banking, insurance, financial services). This segment (36% of total sales) grew by 8% QoQ during the quarter. A similar performance was also seen from the ‘energy & utilities’ practice, where sales grew by 8% QoQ. ‘Telecom’ was however the worst performer, which a 4% decline in sales.

  • As for the geographical performance, the European crisis weighed heavy on Infosys’s performance during 1QFY11. Sales from this region fell 6% QoQ during the quarter. However, some recovery was seen in the business from North America. Sales here grew by 6% QoQ. India was again the best performer for the company, as business here grew by a robust 27% QoQ.

  • On an overall basis, the growth in sales was owing to higher volumes (man-hours billed) during the quarter. While offshore volumes grew by 8% QoQ, onsite volumes were up 7% QoQ. A large part of this increase in volumes can be attributed to higher utilisation of employees. This increased to 73% during 1QFY11, from 69.3% during the previous quarter (4QFY10). In what could be seen as the slowest pace of hiring in a long time, Infosys hired just about 1,025 employees (on a net basis) during the quarter. Interestingly, the count of people it had on training dropped by around 14% QoQ during the quarter. The company also recorded an increase in employee attrition. This stood at 15.8% at the end of the quarter, as compared to 13.4% at the end of the previous quarter (ended March 2010).

    Revenue break-up
    Rs m 4QFY10 1QFY11 Change
    By service offerings      
    Application development and maintenance 23,538 25,288 7.4%
    Application development 9,986 10,475 4.9%
    Application maintenance 13,552 14,813 9.3%
    Business Process Management 3,685    3,533 -4.1%
    Consulting Services and Package Implementation 15,454 15,433 -0.1%
    Infrastructure Management 4,280   4,277 -0.1%
    Product Engineering Services 1,070    1,302 21.7%
    System Integration 2,675   2,603 -2.7%
    Testing Services 3,923    4,525 15.3%
    Others 1,843    2,107 14.4%
    Total services 56,468 59,067 4.6%
    Product revenues 2,972    2,913 -2.0%
    Total revenues 59,440 61,980 4.3%
    By industry vertical      
    Insurance, Banking and Financial services 20,685 22,375 8.2%
    Manufacturing 12,007 12,086 0.7%
    Retail 7,727    8,181 5.9%
    Telecom 9,094   8,739 -3.9%
    Utilities 3,448    3,719 7.9%
    Transportation Logistics 1,070    1,116 4.3%
    Services 2,913    2,975 2.1%
    Others 2,496   2,789 11.7%
    By geography        
    North America       39,290 41,713 6.2%
    Europe          13,374 12,582 -5.9%
    India              832 1,054 26.6%
    Rest of world            5,944 6,632 11.6%

  • Infosys’s operating margins declined by 1.8% QoQ to 28.3% during 1QFY11. Higher employee costs (as % of sales) led to this decline. Higher share of revenues coming from onsite projects (that have lower margins as compared to offshore projects) aided the rise in staff costs and therefore a fall in margins.

  • Led by weaker operating margins and lower other income, Infosys’s net profits declined by around 7% QoQ during 1QFY11. The company also recorded a rise in its effective tax rate, which stood at 25.4% in 1QFY11, from 21.6% in 1QFY10.

  • The company is sitting on a huge cash balance of around US$ 3 bn.

What to expect?
At the current price of Rs 2,820, the stock is trading at a multiple of 17.5 times our estimated FY13 earnings. Infosys’ overall 1QFY11 performance has been reasonable in light of the volatile business environment it is facing in key global markets. During the conference call, the management appeared cautiously optimistic about the outlook for the rest of the year. While it expects Europe to continue being a laggard, the US is seen as performing better. Also, the management expects the BFSI segment to be the main growth area driving performance for FY11. For Europe, the company are investing to increase its footprint which the management expects will help them increase their clients and in turn revenues from the region. The management has also raised its FY11 earnings guidance. Revenue estimates have also been increased. The company now expects to grow its FY11 sales by 16-18% YoY as compared to the earlier estimates of 9-11% YoY. This guidance assumes a decline of 2% in the billing rates (similar to that in 1QFY11) and the balance to be driven by growth in volumes. The management expects FY11 earnings per share to be in the range of Rs 112-116, as compared to its previous estimates of Rs 107-112. Earnings will be negatively impacted by appreciation in rupee, fluctuation in other cross currency rates and higher tax rates.

Infosys plans to recruit around 30,000-36,000 employees in FY11 in order to fuel its future growth. However, the company has no specific plans for major acquisition despite having a huge cash reserve of over US$ 3 bn. Nevertheless, it has hinted at being open to smaller acquisitions in European markets particularly in consulting and other high-end segments. At these levels, we maintain our 'Hold' view on the stock from a 2-3 years perspective.our view on the stock

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