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Infosys: Strong second qtr, expects a better year
Oct 15, 2010

IT services major Infosys has announced its 2QFY11 results. The company has reported a 12% QoQ growth in its sales and a growth of 17% QoQ in its net profit. Here is our analysis of the results.

Performance summary
  • Sales grow by 12% QoQ during 2QFY11.
  • Operating margins improve to 30.2% during the quarter as compared to 28.3% during the previous quarter. This is largely due lower cost of sales as well as lower administration costs.
  • Better operating margins and an increase in other income leads to a growth of 17% QoQ in net profits.
  • Boosted by the better performance and improved clarity at the end of the half year, the management has revised its FY11 earnings guidance marginally. It now expects FY11 earnings per share to be in the range of Rs 115-117, as compared to its previous estimates of Rs 112-116.
  • Revenue estimates have also been increased. The company now expects to grow its FY11 sales by 18.5-19.4% YoY as compared to the earlier estimates of 16-18% YoY.
  • The company added 27 new clients during the quarter taking the total number of active clients to 592.


Financial performance snapshot
(Rs m) 1QFY11 2QFY11 Change
Sales 61,980 69,470 12.1%
Expenditure 44,430 48,490 9.1%
Operating profit (EBDITA) 17,550 20,980 19.5%
Operating profit margin (%) 28.3% 30.2%  
Other income 2,390 2,670 11.7%
Profit before tax 19,940 23,650 18.6%
Tax 5,060 6,280 24.1%
Profit after tax/(loss) 14,880 17,370 16.7%
Net profit margin (%) 24.0% 25.0%  
No. of shares 573.9 574.1  
Diluted earnings per share (Rs)*   111.2  
P/E ratio (x)*   27.9  
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 2QFY11?
  • The 12% QoQ growth in Infosys’s 2QFY11 sales was helped by all its segments, particularly the company’s bread and butter business of ‘application development and maintenance’. This segment, which forms around 39% of the company’s total sales, grew by 7% QoQ during the quarter. The other key segment of ‘consulting & package implementation’ (26% of total sales), sales grew by 16% QoQ during the quarter.

  • Based on the industries it serves, Infosys recorded the best performance from the retail space. This segment (14% of total sales) grew by a strong 22% QoQ during the quarter. A similar performance was also seen from the ‘services’ space, where sales grew by 21% QoQ. The main ‘BFSI’ (Insurance, Banking & Financial Services) segment recorded a 10% QoQ growth in sales during the quarter.

  • As for the geographical performance, sales from Europe bounced back to record a 20% QoQ growth during the quarter. Recovery from North America continued during the quarter. Sales here grew by 10% QoQ. India was again the best performer for the company, as business here grew by a robust 39% 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 6% QoQ, onsite volumes were up 11% QoQ. A large part of this increase in volumes can be attributed to higher utilization of employees. This increased to 74.3% during 2QFY11, from 73.0% during the previous quarter (1QFY11). Hiring during the quarter jumped up during the quarter. The company has hired 7,646 employees (on a net basis) during the quarter. The attrition rate continued to remain high. It stood at 17.1% at the end of the quarter, as compared to 15.8% at the end of the previous quarter (ended June 2010).

    Revenue break-up
    Rs m 1QFY11 2QFY11 Change
    By service offerings      
    Application development and maintenance 25,288 27,163 7.4%
    Application development 10,475 10,837 3.5%
    Application maintenance 14,813 16,325 10.2%
    Business Process Management 3,533 3,890 10.1%
    Consulting Services and Package Implementation 15,433 17,923 16.1%
    Infrastructure Management 4,277 4,307 0.7%
    Product Engineering Services 1,302 1,737 33.4%
    System Integration 2,603 3,960 52.1%
    Testing Services 4,525 5,280 16.7%
    Others 2,107 2,293 8.8%
    Total services 59,067 66,552 12.7%
    Product revenues 2,913 2,918 0.2%
    Total revenues 61,980 69,470 12.1%
    By industry vertical      
    Insurance, Banking and Financial services 22,375 24,592 9.9%
    Manufacturing 12,086 13,130 8.6%
    Retail 8,181 10,004 22.3%
    Telecom 8,739 9,240 5.7%
    Utilities 3,719 4,377 17.7%
    Transportation & Logistics 1,116 1,250 12.1%
    Services 2,975 3,612 21.4%
    Others 2,789 3,265 17.1%
    By geography      
    North America 41,713 45,711 9.6%
    Europe 12,582 15,144 20.4%
    India 1,054 1,459 38.5%
    Rest of world 6,632 7,155 7.9%

  • Infosys's operating margins improved by 1.9% QoQ to 30.2% during 21QFY11. Lower cost of sales (as % of sales) as well as lower administration costs led to this improvement. Revenues from onsite projects have increased as compared to revenues from offshore projects. This indicates a growth in demand from clients.

  • Higher operating margins as well as higher other income, led to a 17.1% QoQ growth in net profits during the quarter. The growth offset the impact of higher effective tax rates for the company. The effective tax rate stood at 26.6% in 2QFY11 as compared to 25.4% in 1QFY11.

  • The company is sitting on a huge cash balance of around US$ 3.4 bn.

What to expect?
At the current price of Rs 3,099, the stock is trading at a multiple of 19.2 times our estimated FY13 earnings. The company has declared an interim dividend of Rs. 40 per share, which includes a special dividend of Rs 30 per share.

Infosys’ overall 2QFY11 performance has been good. The company is seeing traction from both US as well as from Europe. In US, the traction has been largely in the consumer, oil & gas and the utilities segments. In Europe, telecom and BFSI segments are expected to fuel the growth. The company has closed 9 major deals on the transformation side and 9 major deals on the outsourcing side. The total contract value of all the deals closed during the first half of the year is US$ 865 m.

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 18.5-19.4% YoY as compared to the earlier estimates of 16-18% YoY. This guidance assumes pricing to remain stable. The growth will be fuelled by higher revenue productivity and utilization. Earnings will be negatively impacted by appreciation in rupee, fluctuation in other cross currency rates and higher tax rates. The management expects a 1.3% decline in operating margins for the full year FY11. This is due to a negative impact on account of currency appreciation. The management has also stated that the tax rates for the full year would be around 26% and this would impact net margins by a further 1.3%.

Infosys plans to recruit around 40,000 employees in FY11 in order to fuel its future growth. It also plans to award 12,000 promotions during the year. However, as per the management, the increase in cost due to these promotions can easily be absorbed by the company.

At the current levels, we maintain our 'Hold' view on the stock. (Research Pro subscribers please ) click here

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