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Infosys: Performance speaks

Oct 10, 2003

At one more instance of performing more that what it had promised, Infosys has presented robust results for 2QFY04. The company has reported a sequential growth of 5% and 8% in its topline and bottomline respectively.

Domain presence: Increased financial and telecom revenues…
  1QFY04 2QFY04  
  Rs m % of total Rs m % of total Change
BFSI 4,047 37.4% 4,414 38.9% 9.1%
Manufacturing 1,688 15.6% 1,623 15.0% -3.8%
Retail 1,255 11.6% 1,266 11.7% 0.9%
Telecom 1,580 14.6% 1,666 15.4% 5.5%
Energy & Utilities 379 3.5% 325 3.0% -14.3%
Transportation & logistics 768 7.1% 768 7.1% 0.0%
Others 1,104 10.2% 963 8.9% -12.7%
Total revenues 10,820 100.0% 11,348 100.0% 4.9%

On the revenues front, growth was mainly brought about by maintenance & testing services and financial & telecom services. On the telecom front, the company had recently won a five-year US$ 50 m contract from Telstra, the Australian telecom major for the purpose of providing software development and maintenance services. Notably, the company witnessed a decline in revenues from high-end services like package implementation and consulting, though this does not signify a trend. Also, revenues from software development declined owing to lower discretionary expenditure by the company’s clients. Infosys has been witnessing pressure on this (development) front due to the fact that its clients globally have reduced spending on new software development.

On the expenditure front…
(Rs m) 1QFY04 2QFY04 Change
Employee expenses 5,370 5,673 5.6%
% of sales 49.6% 50.0%  
Selling and marketing expenses 797 804 0.9%
% of sales 7.4% 7.1%  
General and administration expenses 812 887 9.3%
% of sales 7.5% 7.8%  

Stabilizing billing rates and initiatives on the costs front has helped the company improve its operating margins for the September quarter by 110 basis points. Also, a continued shift offshore has helped the company in paring effects of rising (as percentage of revenues) expenditure levels on the employee and general and administrative fronts. The rise in employee costs is mainly due to addition of 2,205 employees in 2QFY04. This takes the totals strength of employees at Infosys at 19,120. The management plans to hire 3,000 more people in the next two quarters. As a part of its initiatives, the company has been on a hiring spree in anticipation of increased demand from clients, both existing and new. While there still are no concrete signs of large deals flowing Infosys’ way, when that happens, the company would be in a comfortable position to cater to the increased demand.

As for the business process management subsidiary, Progeon, revenues and profits have grown sequentially by 33% and 4% in 2QFY04. The operating margins for this unit have, however, remained constant at 7.6%. During the quarter, Progeon added 3 new clients and 156 employees to its list.

There is too much ‘noise’ about increasing employee dissent in the company over the past few quarters. And the result has shown in increasing levels of attrition (see the chart above). But we believe this to be a short-term phenomenon as the company continues to ‘invest’ (and not spend) for growth as far as employees are concerned. Another concern regarding the appreciation of the rupee also seems short-term in nature, as the company has well hedged its receivables.

In its view of improvement in Infosys’ performance, the management has raised its earnings guidance for FY04. From the earlier Rs 168, the EPS guidance has revised upwards to Rs 178, a gain of 24%. The raison d'être for this upgradation is based on the management’s faith that a greater stability is likely to be witnessed in the pricing environment and that volumes are likely to grow as large deals come Infosys’ way. Despite the fact that the stock has run up considerably since the company revised its earnings guidance in July, the management’s ability to take the company towards higher growth trajectory should soothe long-term investors.


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