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Infy: 2QFY02 result analysis

Oct 10, 2001

Infosys’ performance has muted all the doubts regarding the company’s ability to grow in difficult times. Considering the uncertainty in the environment, Infosys has achieved quite a feat by managing to hike billing rates. Infact in the first quarter the company had shown a decline in billing rates for offshore services. To view the results please follow this link.

While all the geographies except India have shown growth on a sequential basis, rest of the world grouping, according to Infosys grew the fastest. This could be due to the higher growth from the Asia Pacific region. Infosys has identified Singapore as a key market and recently opened an office there. The growth from Europe was marginal. The US geography grew by 4.5% sequentially contributing 71.1% to the revenues. The decline in revenues from India is due to the fact that Infosys bagged many orders for its banking product in 1QFY02, which was not the case in 2QFY02.

De-risking geographic concentration
(Rs m) 1QFY02 2QFY02 Change
North America 4,422 4,622 4.5%
% of revenues 72.2% 71.1%  
Europe 1,213 1,229 1.3%
% of revenues 19.8% 18.9%  
India 159 117 -26.5%
% of revenues 2.6% 1.8%  
Rest of the world 331 533 61.2%
% of revenues 5.4% 8.2%  

Infy continued to ramp up its maintenance business. The contribution from maintenance to revenues increased from 28.6% in 1QFY02 to 29.4% in 2QFY02. This is due to the fact the companies in uncertain economic environments are focusing the IT spend on mission critical activities like maintenance. Areas like development and re-engineering have shown marginal growth. Contribution of software development to revenues declined from 33.1% in 1QFY02 to 31.7% in 2QFY02. The contribution from re-engineering also came down from 11.2% in the first quarter to 10.6%.

Maintenance grows but consulting dips
(Rs m) 1QFY02 2QFY02 Change
Development 2,027 2,061 1.6%
Maintenance 1,752 1,911 9.1%
Re-engineering 686 689 0.5%
Package implementation 533 566 6.1%
Consulting 312 280 -10.5%
Testing 190 189 -0.7%
Engineering services 123 169 38.0%
Other services 300 390 30.0%
Total services 5,923 6,254 5.6%
Products 202 247 22.2%
Total revenues 6,125 6,501 6.1%
Internet / E-commerce related 1,409 1,528 8.4%

The contribution of products to revenues grew to 3.8% in 2QFY02 as compared to 3.5% 1QFY02. The core-banking product has been very successful and has gained wide acceptance globally. Infact, Infosys has now certified other companies to take care of training and implementation of the product. Usually, companies with very mature products like SAP managed this feat. Products will be one area from which the company can show strong growth. An increased contribution from products to revenues would mean higher operating margins for the company.

The product implementation business for Infosys did not show a change in contribution to revenues. The contribution remained constant at 8.7%. Infosys’s alliance with TIBCO and move into the EAI space could boost the revenues from this service offering in the near future. Another positive development was that the revenues from e-commerce have shown a sequential growth for 2QFY02, after declining consecutively for two preceding quarters. The segment’s contribution to revenue increased from 23% in 1QFY02 to 23.5%

The cause for concern is that Infosys’ focus area consulting services seems to have taken a hit. The decline in revenues caused the contribution to the topline from this area to decline to 4.3% in the current quarter compared to 5.1% in the first quarter. The other area that has shown de-growth is software testing.

There has been an increasing trend to move towards fixed-price projects on part of the clients. This is in a bid to get a ceiling on project costs. While fixed price projects have shown a 17.5% growth during the quarter, the time and material projects grew by a marginal 1.9%. Fixed time projects contributed to 29.9% to the revenues in 2QFY02 as compared to 27% in 1QFY02. The balance revenues come from time and material projects. Infosys aggressively taking up fixed price projects does highlight the company’s confidence in its ability to deliver on time. However, this has more risk than time and material projects. This is due to the fact that in case Infosys cannot complete a project on time it will not be paid for the additional time taken to complete the project.

The numbers for the verticals do not have much of a surprise element. As expected the telecom sector continued to show de-growth. The company’s clients, mainly equipment manufactures like Nortel, Cisco and Lucent have been facing declining demand and their financials have been affected. These companies are cutting costs, which includes projects outsourced to Indian software companies. Infosys added a big name JDS Uniphase, an optical equipment manufacturer, from this domain in 2QFY02. The contribution from the telecom vertical however declined from 16.7% in 1QFY02 to 15.3%.

BFSI growth continues
(Rs m) 1QFY02 2QFY02 Change
Manufacturing 1,121 1,118 -0.2%
Insurance, banking & financial services 2,254 2,483 10.2%
Insurance 1,005 1,138 13.3%
Banking & financial services 1,250 1,346 7.7%
Telecom 1,023 995 -2.8%
Retail 680 748 10.0%
Utilities 116 111 -5.0%
Transportation & logistics 141 182 29.2%
Others 790 865 9.4%

Banking, financial service and insurance (BFSI) verticals exhibited strong growth. This caused the contribution from this domain to increase from 36.8% in 1QFY02 to 38.2% in 2QFY02. The insurance segment grew faster contributing 17.5% to the revenues as compared to 16.4% in the preceding quarter. The contribution from banking and financial services companies was 20.7% compared to 20.4% in 1QFY02. In the next two quarter its will be very interesting to note how these numbers move as companies in the BFSI domain in the US have been worst affected by the September 11 tragedies. We could see some decline in the revenues sequentially. The list of clients added from this vertical during the quarter include ING group, Royal Bank of Canada, DCZ DekaBank and Kenya Commercial Bank.

However, the decline in revenues from the manufacturing segment was unexpected. The contribution from this vertical slipped from 18.3% to 17.2% in the second quarter. Retail and transportation & logistics verticals have also shown strong growth. While retail contributed 11.5% (compared to 11.1% in 1QFY02), the contribution from transportation & logistics was 2.8% (compared to 2.3% in 1QFY02).

Thus, considering the fact that the company has managed to maintain its growth in all key services offering and domains, once again establishes the fact why Infosys is an industry leader. Infact, the increases in revenues from area like e-commerce and its products could point to strong growth possibilities.

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