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Infy: Robust growth - Views on News from Equitymaster
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  • Oct 9, 2002

    Infy: Robust growth

    It’s the result season once again and tech major Infosys will declare its 2QFY03 results tomorrow. The result will be keenly watched, as always, as Infosys’ numbers and outlook are taken as a benchmark for the domestic technology sector. With ‘fog on the windscreen’ regarding future prospects of the sector, markets will look for more clarity. However, as far as clarity is concerned, markets are likely to be disappointed, as the economic environment in the US, the largest market for the software sector, continues to be very uncertain.

    To briefly re-cap the story so far, Infosys in FY01 had posted a strong 103% growth in topline (dollar terms). Of this, 41% came from price growth and 62% came from volume growth. However, with the technology meltdown, Infosys hit a speed breaker and managed to post a topline growth of 32% in the next year FY02. This was on the back of 34% growth in volumes. However, a part of the growth was offset by a 2.5% dip in billing rates. The company had initially indicated an 18% to 20% growth in revenues for FY03, but it pleasantly surprised the markets with a steep sequential (QoQ) 12.5% growth in revenues in the first quarter. Subsequently, the company revised its revenue guidance marginally upwards. Infosys now expects revenues to grow between 19% to 23% for the fiscal.

    The growth in 1QFY03 was based on a 12.5% growth in volumes, while the company saw a 0.6% decline in billing rates. The growth in volumes was the highest seen in the past five quarters. This could point to the fact the clients that had frozen their IT spending as a reaction to the slowdown in the US economy, were once again beginning to spend; though a lot more cautiously than before. Another thing that has benefited the Indian software sector is the fact that spending has been directed towards getting more from existing technologies rather than buying new ones. Therefore, Indians that have strong presence in the enterprise application integration, development and maintenance areas stand to gain.

    While revenues show strong growth, decline in operating margins are a cause for concern. Infosys saw a sharp decline in operating margins in 1QFY03. This was due to increased onsite component in the revenues mix and rise in marketing expenses. For 2QFY03, the management has indicated a flat to 2% sequential growth in revenues. The sequential growth in net profits is expected in the range of 1% to 4%. Thus, operating margins are expected to improve in 2QFY03. However, considering the strong growth in volumes during 1QFY03, the management might once again, under promise and over deliver. We expect the volumes to grow by 6% QoQ, but the pressure on billing rates will continue. Therefore, the revenues are expected to grow by about 5%.

    The improvement in operating margins could come from two quarters. Firstly, the marketing expenses could be lower as compared to the previous quarter and change in the onsite offshore mix in favour of offshore projects could further aid margins. However, we have factored in a sharp decline in other income on the back of rupee gaining against the dollar and increased depreciation. Consequently, we expect the rise in net profits to be about 4% sequentially.

    (Rs m) 1QFY03 2QFY03E Change
    Sales 7,646 8,029 5.0%
    Other Income 249 150 -39.8%
    Expenditure 4,897 5,016 2.4%
    Operating Profit (EBDIT) 2,749 3,012 9.6%
    Operating Profit Margin (%) 36.0% 37.5%  
    Interest - -  
    Depreciation 405 450 11.2%
    Profit before Tax 2,594 2,712 4.6%
    Tax 425 447 5.3%
    Profit after Tax/(Loss) 2,169 2,265 4.4%
    Net profit margin (%) 28.4% 28.2%  
    Diluted number of shares 66.1 66.1  
    Diluted Earnings per share* 132.1 137.1  
    P/E (x)   26.1  

    During the quarter, Infosys continued with its efforts to strengthen its banking product Finacle. The company tied up with Sun Microsystems to provide a robust platform for its flagship product. The company concentrated on expanding into newer markets. It opened a global development centre in Australia and entered into a relationship with Avaya, a CRM (customer relationship management) solutions company, to implement its packages. Further, Infosys also showed signs for breaking into the top league. It recently bagged a contract from Bank of America. The other companies that were also picked by the Bank of America were TCS and Accenture.

    Particulars FY02 FY03E
      1Q 2Q 3Q 4Q FY02 1Q 2QE
    OPM (excl. Other Inc.) 39.3% 39.8% 40.5% 39.8% 40.1% 36.0% 37.5%
    Tax / PBT 13.0% 14.1% 14.5% 15.3% 15.6% 16.4% 16.4%
    NPM 31.0% 29.8% 31.2% 31.1% 30.9% 28.4% 28.2%
    Cash FDEPS (Rs) 34 34.9 37.4 38.6 146.5 38.9 41.1
    FDEPS (Rs) 29.5 28.9 31.2 31.8 122.2 32.8 34.3

    However, during the quarter, the company also suffered a setback as it lost its global sales head, Mr. Phaneesh Murthy to a controversy. At the current market price of Rs 3,526, the stock is trading at a 26x its FY03E estimated earnings. Considering the uncertainty in the US economy there could be a negative surprise going forward. This could cause volatility in the price. However, considering the long-term prospects (three to five years) the valuations are attractive.



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