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Infosys: Braving the headwinds - Views on News from Equitymaster
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Infosys: Braving the headwinds
Oct 10, 2008

Performance summary
  • Net sales grow by 12% QoQ in 2QFY09 on stable pricing.

  • Revenue from North America grew by 3% QoQ, Europe by 8% QoQ and rest of the world by 10% QoQ.

  • Operating margins expand by 2.6% QoQ helped by rupee's depreciation against the US dollar and a low base in 1QFY09.

  • Net profits grow by 10% QoQ during the quarter.

  • Adds 40 new clients and 5,900 employees during the quarter; total headcount now stands at 100,300 employees.

  • Management maintains its sales and net profit guidance for FY09 in rupee terms. Revenue guidance in US dollar terms however revised downwards from 19%-20% earlier to 13%-15% now to reflect the situation prevalent in global markets.


Consolidated financial snapshot
(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 48,540 54,180 11.6% 78,790 102,720 30.4%
Expenditure 33,750 36,240 7.4% 55,110 69,990 27.0%
Operating profit (EBDITA) 14,790 17,940 21.3% 23,680 32,730 38.2%
Operating profit margin (%) 30.5% 33.1% 30.1% 31.9%
Other income 1,170 660 -43.6% 4,070 1,830 -55.0%
Depreciation 1,690 1,770 4.7% 2,880 3,460 20.1%
Profit before tax 14,270 16,830 17.9% 24,870 31,100 25.1%
Tax 1,250 2,510 100.8% 3,080 3,760 22.1%
Profit after tax/(loss) 13,020 14,320 10.0% 21,790 27,340 25.5%
Net profit margin (%) 26.8% 26.4% 27.7% 26.6%
No. of shares (m) 573.6 573.6 573.3 573.6
Diluted earnings per share (Rs)* 90.9
P/E ratio (x)* 13.0
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • Infosys recorded a topline growth of 12% QoQ during 2QFY09. This growth was mainly aided by higher volumes (grew 6.6% QoQ) and marginal increase in billing rates. As for volumes, these grew by 4.1% QoQ and 7.6% QoQ for onsite and offshore projects. Billing rates improved by 0.6% QoQ for onsite projects and 0.1% QoQ for offshore services. Infosys added 40 new clients during the quarter thus taking the total number of active clients to 586.

  • Infosys has recorded the strongest performance in the ‘consulting and package implementation’ service, followed by ‘application maintenance’ and ‘application development’. The consulting and package implementation registered 19% QoQ growth (the segment account for over 25% of the revenue). This robust growth in the segment is indicative of the company’s continuous move up the value chain.

  • Based on geographies, Infosys registered 3% QoQ revenue growth in sales from North America, 8% QoQ growth in Europe and 10% QoQ growth in rest of the world. The growth in the European region and other geographies indicates that company has been able to diversify its revenue well. This is in line with the company’s strategy to derive its revenue from North America, Europe and rest of the world in a ratio of 40:40:20 going forward. Based on verticals, Infosys has witnessed the strongest performance in ‘manufacturing’ followed by ‘banking and financial services’ and ‘telecom’.

  • Infosys added a net of 5,900 employees during the quarter. The company’s total headcount stood at 100,300 employees at the end of September 2008, with 93,600 being software professionals and the remaining in sales and support functions. The utilisation (excluding trainees) improved from 72.2% 1QFY09 to 73.7% in 2QFY09. Attrition levels dropped to 12.8 % during 2QFY09 as compared to 13.6% during the previous quarter.

  • Infosys’ operating margins expanded by 2.6% QoQ during 2QFY09, which was duly helped by 6% depreciation of rupee against the US dollar, higher utilisation levels, greater share of offshore revenues, and improvement in employee productivity.

  • Infosys reported a 10% QoQ growth in its net profits during 2QFY09. This growth was impacted by 44% QoQ decline in other income and higher tax outgo, which almost doubles sequentially.

What to expect?
At the current price of Rs 1,220, the stock is trading at a very attractive multiple of 8.6 times our estimated FY11 earnings. Amidst ongoing global financial turmoil in the US and Europe, the company’s management seems confidant of achieving revenue growth of 27% to 30% YoY (in rupee terms) during the current FY09. In fact, these estimates are in line with what the management had indicated at the end of 1QFY09 as well.

The management expects growth to be intact going forward on account of strong pipeline of projects. As indicated in the conference call, the company has 12 deals in the pipeline for the next 9 to 12 months. It recently won 5 transformation deals which gives good revenue visibility going forward as these deals can be positioned at the higher end of the value chain. What is however more important is that the company has managed to maintain pricing and expects it to be stable in the near future. However, some delay in decision making from the clients’ side is what the management expects can impact performance in the near term.

On its bid for Axon, the management has indicated that it will not be raising the same to counter that of HCL Tech and would rather look out for some other attractive opportunities in the related space.

  • Also read - Why Infosys didn’t raise the bid for Axon?

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