It will help if the management is a little more forthcoming about the performance results of the group.
The many meanings of a symbol
The 'symbol' that this Bangalore based company has fashioned reflects the aspirations of the founders of this company. There is the cobalt blue triangle which is intertwined with three aqua green stripes and circled by an aqua green ellipse, or a plane curve. The triangle is an 'infinite' triangle and is a symbol of its focus on its customers, shareholders and employees. The colour cobalt blue reflects the management's philosophy of knowledge, depth expertise and stability.
The stripes points to the future and embodies the six values that come under the three drivers of integrity, innovation and intellect. The aqua green colour reflects growth, harmony and constant fresh ideas. The ellipse embodies synergy between all, the above entities and it originates and fades into infinity. This must be one swell of a company where even the colours and codes depict an aspirational value, and, this is a tough act to follow.
The management informs that Infinite Computer Solutions is today among the fastest growing IT services companies and telecom solutions provider, with an integrated network of delivery facilities across India and the US complemented by onsite, offsite and near shore capabilities in major international markets. The company has offices in the US, India, China, Malaysia, and Singapore. The five global delivery centres are located in India - 2 in Bangalore, and one each in Hyderabad, Chennai and Gurgaon. The products on offer include Application management services, Infrastructure management services, Product and IP Leveraged Solutions, and Mobility solutions.
The company structure
There is the 12 year old standalone company with a capital base of Rs 440 m, a gross fixed assets base of Rs 779 m, investments valued at Rs 888 m, debt of Rs 49 m, revenues including other income of Rs 2.3 bn and a pre-tax profit of Rs 377 m. Then there is the consolidated entity with a capital base of Rs 440 m (the paid up capital bases of its siblings do not appear to have been factored in-how is that possible?) a fixed asset base of Rs 2.2 bn, investments of Rs 168 m, debt of Rs 461 m, revenues of Rs 8.8 bn, and a pre-tax profit of Rs 1.3 bn. The consolidated entity incorporates the value add of 15 other group companies which are wholly owned siblings. The shareholding pattern reveals that the promoters hold 63.8% of the outstanding equity, and a foreign institutional investor holds another 15.4%. Thus, collectively, 79% of the capital base is closely held.
One of the fastest growing IT companies, Infinite, registered a 23% increase in Sales to Rs 2.2 bn during the year. Export sales accounted for a slice over 70% of all sales. (The increase in sales was however achieved at a much higher cost. Trade debtors at year end accounted for 28% of revenues compared to 22% of revenues previously. But the higher level of trade debtors has to also be seen in the light of the advances received from customers amounting to Rs 54 m at year end. In the preceding year end the corresponding figure was very nominal). Factor in other income of Rs 60 m, and the total revenues accelerated 22% to Rs 2.3 bn. But the pre-tax profit took a neat dive by 38% to Rs 376 m from Rs 610 m. The management has not deigned to attribute any reasons for the fall in profit, barring a rather perfunctory admission about the pre-tax and the post tax profits.
Margins under strain
But there are several pointers to what may have happened. The fall in profits was primarily on the back of a 71% increase in the biggest revenue expenditure item by far - employee costs to Rs 1.2 bn. The increase in administrative costs added their mite rising 28% to Rs 635 m. This latter schedule reveals that there was some shift in the manner in which it executes projects or some such. There is decline in payouts under contractual expenses to Rs 187 m from Rs 244 m previously. Simultaneously there is a sharp rise in the project expenses to Rs 130 m from Rs 13 m previously. What this really infers is not very clear.
It is of course impossible to get a hang of why employee costs rose in such a random manner relative to the increase in revenues, given the inadequate details of how the IT revenues are harnessed. The management's silence in the matter does not help in any way either. Or was it an investment in employee intellectual property prior to the accelerations in sales? In any event there appears to be a severe mismatch here. The company also does not appear to have a superannuation policy in place. One of its executive directors, Mr Navin Chandra is pushing 73 years of age!
IT Company reports - a no brainer
Annual reports of IT companies by and large make for dull fare given the lack of quantitative data in the schedules to the accounts to fall back on, in a quest to make out what the company is all about. Infinite is no less so. But there are still some interesting asides. The interest charges debited to the P&L accounts fell marginally to Rs 20.5 m from Rs 23.8 m in the wake of a higher year end debt of Rs 49 m against Rs 13 m previously. There was however a considerable cash flow from 'investment activities' during the year. It sold investments worth Rs 1.4 bn; purchased current investments valued at Rs 700 m and hiked the value of its investments in its subsidiaries. At year end the book value of its investments in its subsidiaries rose by Rs 474 m to Rs 782 m from Rs 308 m previously. The value of its current investments however fell by Rs 658 m to Rs 106 m from Rs 764 m previously. The company did not however make more than a dime on the purchase/sales of current investments during the year.
But what is interesting in all this is that the company also quietly had some capital account transactions during the year, details of which is available only from the auditor's report to the shareholders. The company has during the year granted unsecured loans worth Rs 57 m which was repaid before the end of the year. It has also borrowed Rs 174 m from group companies which was also repaid during the year. The auditor's state that the interest paid and received was not prima facie prejudicial to the interests of the company. In the preceding year the loans outstanding to siblings at year end amounted to Rs 272 m.
The siblings and their antics
As stated earlier the parent has 15 siblings/ siblings of siblings, with 10 of them dotting the globe from China, USA, Singapore, Malaysia, Australia, and the UAE. The balance five companies are based out of India. They are all 100% owned offspring. (Coming to think of it what is the rationale of the parent having five dedicated India based siblings? Are they on some unique footing that their operations cannot be dovetailed into the revenues of the parent or some such?) Collectively, the top-line of the consolidated group with revenues of Rs 8.8 bn during the year dwarfs the revenue generation of the standalone company. In terms of geographical spread – the Americas was the front runner with 83% of all revenues followed by the domestic sector with 7.5%, Europe with 6.1%, and APAC or Asia Pacific bringing up the rear with 3.5%. In line with the revenues, the net profit of the consolidated entity dwarfs that of the standalone unit. The consolidated entity netted a post tax profit of Rs 1.1 bn. Separately there are three entities, N C Data Systems Pvt. Ltd, Mumal Mining, and Instos Inc USA in which key management personnel have significant influence.
One of these latter affiliates, Instos Inc USA, had significant revenue transactions of Rs 651 m during the preceding year either with group companies or is it with the parent company, but the relations appears to have cooled off substantially during the latter accounting year. Significantly the trade dues outstanding at year end from Instos in the preceding year were a very meagre Rs 34 m. Among the many siblings, only two appear to matter in terms of inter-se transactions with the parent. Needless to state, the transactions are with the two America based siblings - Infinite Computer Solutions and Infinite Convergence Solutions. The parent ratcheted up revenues of Rs 627 m by effecting sales to them during the year.
Individually too, the many siblings by and large appear to be mere pygmies in terms of total asset values That is barring the two American siblings, and one India based sibling, Infinite Data Systems. (Four of the 15 have yet to open their account).The two big sisters between them have a total capital base of Rs 664 m, total assets of Rs 4.5 bn and combined revenues of Rs 6 bn. Incidentally, of the two, the company with the substantially lower capital base, Infinite Computer Solutions, has both a substantially higher total asset base, and turnover, but boasts a pre-tax profit which almost matches the performance of the second sister. But the two companies raking in the big bucks are the two the India based siblings, Infinite Data Systems Pvt. Ltd, and Infinite Infosoft Services. The former has a capital base of a mere Rs 10 m, but ponied up revenues of Rs 548 m and registered a pre-tax profit of Rs 338 m. The latter has a similar capital base but managed to rope in a top-line of Rs 334 m and a bottom-line of Rs 153 m. This is real money for jam or something and these two must be fashioning something very chic.
Another oddity is desi based India Comnet International, which on a pipsqueak capital base of Rs 1 m, boasted revenues of Rs 175 m but could only manage a bottom-line inked in red. Is it so easy to pull rabbits out of a hat please? None of the companies have paid out any dividend, though the book value of the parent's investment in its subsidiaries at year end was Rs 782 m. But then, that is nothing new. The parent has however shown dividend receipts of Rs 26 m. This amount probably infers its revenue pickings from its debt securities.
It is difficult to hazard a guess on the growth prospects of IT companies simply because there is very little meat to go by. But the CEO in his address to the shareholders brushes aside any concerns that may arise. Says he in his message, "the second decade promises to be one of sustained growth...built on multiple revenue streams with our existing marquee client base and potential new clients." The client base is of a blue chip nature - Verizon, IBM, Fujitsu, ACS, Alcatel-Lucent, Motorola, Tellabs etc.
On the back of this confidence the company has given a consolidated revenue guidance of Rs 11 bn to Rs 11.3 bn for the current year in rupee terms. At the net profit level, the company is confident of achieving between Rs 1.2 to Rs 1.3 bn. It is of course to be hoped that the subsidiaries will also be sharing a part of their good will with the parent.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
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.