Time was when the sales and profits of Infosys grew by leaps and bounds, year in and year out, much to the collective disbelief of its promoters, investors and the markets. This disbelief was basically a spinoff from the market's inability to figure out what exactly the company made, and to whom they sold. And throw in the very funda that the promoters themselves were basically plain vanilla offerings with no entrepreneurial background from the market's point of view. Not that the markets are very much wiser today on what Infosys puts on the table and the directors' very learned report for 2009 to the shareholders, only tends the confuse the issue a bit more.
But atleast analysts have, after much pushing and shoving, figured out by now how to roughly tabulate the results of IT companies in advance of the announcement of their results. That in itself is epoch making. Equally epoch making, was the sudden and dramatic expansion of the English lexicon necessitated by the IT boom, thanks to the coining of new words and terminologies. 'All Weather Stocks' was the nomenclature that the markets conjured up for IT stocks in the go-go days of old. 'ICE stocks' was another.
Infosys has also realized much to its chagrin, that once a company reaches a critical mass, it becomes difficult to keep the tempo going. This inspite of the humungous and ever growing pie in IT outsourcing, product software like Finacle, and, other spinoff benefits like facilities management and so on. India's software exports too are growing at a faster rate. Rupee sales increase of Infosys is now limited to a more earthbound 4-5% yearly, with a corresponding hike in the bottomline. But that is still enough to keep the P/E ratios of the top brand IT companies revving at a high RPM.
The only other niggling and moot point is the tax provisions that the company will have to provide in future on its pretax profits. In 2009 the tax provision was a neat 23% of pre-tax profits, up from 13.3% in the preceding year. In other words, the tax concessions on STPI incomes are slowly getting eroded. But there is no clarity yet on whether these tax concessions will be revived or whether they will actually be phased out totally. If the latter, then it will play on the company's post tax profits and P/Es in future.
Going by the directors' stargazing, the company is shooting straight for the heavens, but the effects of this thinking has yet to filter down to the revenue account. However what makes change more possible in Infosys is that the board opts for a new CEO every now and then and, in the process, the company imbibes fresh knowledge inputs through these new thought processes.
SETLabs, its R&D and innovation unit, seems to be the company's armcandy to the future. But it is impossible for the uninitiated to comprehend the essence of what work the R&D unit is doing, given the technical gobbledegook language that its working is couched in, in the annual report. The management also very laudably informs us that they have identified 7 key areas that are rapidly increasing in influence and present great
scope for IT led innovators - digital consumers, emerging economies, sustainable tomorrow, smarter organizations, new commerce, pervasive computing and healthcare economy. Soothing words alright, but it will help if the company can throw in a lifeline on the probable size of this emerging overall market, on what IT has to do with a sustainable tomorrow etc, and, ultimately, what all this means to Infosys. Otherwise it makes for pure poppycock. And, lately, with the company having wised up to the fact that no one reads annual reports anyway, it has presented only the abridged set of statements.
For the moment we have to go by more mundane figures like the company adding 141 clients and 27,000 employees to its rolls in 2009, that the number of its million dollar clients grew to 338, right upto six 100 m dollar clents. Or that it has built a 1.44m square feet Global Education Center which can train 14,000 employees at a time. It is also indeed ironic that when one of the stated dual objectives of IT is to reduce HR and wage costs and add to efficiency, the IT industry actually creates these technology marvels by employing even more HR, and, by owning huge land banks and millions of square feet of commercial office space.
Going by the yardstick of its physical infrastructure of 2.55m square feet, its billings work out to Rs 8,280 per square feet in 2009 against Rs 8,966 per square foot in 2008 and with over 92,000 employees in 2009, billings were Rs 2.28 m per employee against Rs 2.36 m previously. Clearly, the infrastructure is growing faster than the income generated. The parent drawfs its 14 subsidiaries (including subsidiaries of subsidiaries), some of which have yet to get off the ground. Clearly, there is a lot of scope here but the days ahead are not going to be a cakewalk for these companies. These offspring, as yet, contribute not a mite to the parent's 'other income'. If nothing else the company can now claim that the sun never sets on Infosys.
What the company really has going for it is its liquid and marketable assets of close to Rs 150 bn at end 2009. These cash surpluses today earn low yields, due to the low discount rate on debt instruments and the conservative investment policy on liquid resources. The company will sooner than later have to find a profitable outlet for this investible surplus. If all else fails it could possibly apply for a banking licence. After all, the promoters basically hail from South Kanara, which has produced more bankers than any other region in India
Disclosure: Please note that I am a shareholder of this company
This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
© Equitymaster Agora Research Private Limited