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Michael Luddy

INFY AT A GLANCE

P/E ► 21.7 AVG EV/EBITDA ► 18.3 AVG ROA ► 28.7% HIGH ROE ► 33.6% AVG Debt to Equity ► 0.163 VERY LOW Current Ratio ► 5.69 VERY HIGH

 

 

 

 

 

 

Infosys Technologies (NASDAQ: INFY) is an Indian IT services firm that develops custom software and provides business process outsourcing (accounting, HR, IT) for large corporations. Infosys has been a prime beneficiary of the outsourcing boom that has taken place in India throughout the 2000s. The company's revenue and employees grew approximately 400% and 500%, respectively, from 2003 to 2007. In recent years, however, Infosys along with other Indian firms have also faced rapid wage inflation, as U.S. corporations have flocked to India in search of inexpensive but skilled labor for their own overseas operations; wages have been growing by more than 14% per year from 2005-2007. ^[1].

Although Infosys' margins have dropped in recent years, the company is still significantly more profitable than Wipro, its closest competitor. It commands larger, more lucrative projects, resulting in higher revenue per employee. At the same time, it pays its employees, particularly new recruits, less than the industry average. The company's reputation and its best in industry training make it easy for it to attract high caliber candidates, despite lower salaries. Infosys received over 1.3 million applications in 2007, and hired less than 3% of applicants. ^[2].

In the near term, Infosys' biggest risk is its continued rapid growth. Infosys' business is employee intensive, meaning that the company has to hire large numbers of employees to in order to grow revenue. The company has grown from just over 15,000 ^[3] employees at the end of 2003 to over 72,000 ^[4] at the end of 2007. While the company's reputation is a major asset in attracting new recruits, training and integrating increasingly large numbers of new recruits will prove a major challenge for the company.

Company Breakdown

Services:

^[5]

^[6]

Infosys makes most of its money from the development, maintenance, and implementation of software.

Industries:

Infosys primarily serves the following industries:

• Manufacturing
• Banking and financial services
• Insurance
• Telecom
• Retail
• Energy
• Transportation

Of the 7 industries that Infosys serves, banking and financial services are the largest accounting for 30.2% of the company's revenue, followed by Telecom at 19.3%.^[7]

Geography:

^[8]

Infosys is heavily weighed towards North America, and more specifically the US. North America accounts for 63.3% of sales. It is worth noting that Infosys only gets 1.6% of sales from India and only 10.3% of revenues come from outside of North America and Europe. ^[9]

Infosys Latest Result Update

Performance Summary

• Net sales grow by 2% QoQ in 2QFY10 on back of increase in volumes.
• Operating margins expand marginally by 0.5% QoQ though impacted to an extent due to foreign exchange volatility.
• Net profits grow by 1% QoQ. Growth slower than that in sales owing to decline in other income.
• Declares an interim dividend of Rs 10 per share.
• Adds 1,550 employees (net) and 35 new clients during the quarter.
• FY10 EPS guidance stands at around Rs 100 per share, up around 4% from the guidance given in July 2009.

• On a trailing 12-months basis

What has driven performance in 2QFY10?

• Infosys recorded a topline growth of 2% QoQ during 2QFY10. This was mainly aided by higher volumes mainly at its offshore projects (volumes grew 3% QoQ) and easing of pressure on billing rates. The revenues from top-10 customers increased by 6% QoQ during 2QFY10. Infosys added 35 new clients during the quarter thus taking the total number of active clients to 586.
• Based on service lines, Infosys has recorded the strongest performance in the 'infrastructure management' service, followed by 'system integration. These segments improved as the demand for transformational services increased after a lot of mergers and acquisitions taking place among businesses mainly in the banking and finance domain. The infrastructure management service registered 21% QoQ growth in revenue during the quarter, while accounting for 8% of the company's consolidated revenue. However the performance remained weak for the application development and maintenance segment, which contributes over 40% to Infosys' topline. This segment registered a dip of around 2% QoQ. Consulting and package implementation services also showed muted performance.
• Based on geographies, Infosys registered a 4% QoQ growth in sales from North America, its major market which contributed about 65% of the overall revenues. The performance in Europe remained poor as economic conditions in the region still remain weak. A lot of traction came from the Indian market, which grew by 36% QoQ during 2QFY10, indicating the company's focus in India which presently contributes only 1% of its sales. Based on verticals, Infosys witnessed the strongest performance in 'banking and financial services' followed by 'retail' and 'utilities'. However the performance of the 'manufacturing' and 'telecom' verticals remained weak.

Source: Company

• Infosys added a net of 1,548 employees during the quarter. Its total headcount stood at 105,453 employees at the end of September 2009, with 97,594 being software professionals and the remaining in sales and support functions. The utilisation (excluding trainees) improved from 70.9% in 1QFY10 to 73.2% in 2QFY10.

• Infosys' operating margins expanded by 0.5% QoQ during 2QFY10. Despite increase in volumes, the margins remained nearly flat due to increase in sales and marketing as well as training expenses. Foreign exchange volatility also impacted the margins. However, higher utilisation levels, greater share of offshore revenues, and improvement in employee productivity had a positive impact on the margins.

• Infosys reported a 1% QoQ growth in its net profits during 2QFY10. Performance here was impacted by 13% QoQ decline in other income and higher tax outgo and depreciation charges.

Trends and Forces

India's high wage growth, pushes down INFY's margins. Demand for IT professionals has dramatically increased over the past several years. India has become a primary source for IT professionals leading to salary inflation. Salaries for Indian IT professionals have had an average annual growth of 14%. Although Infosys has seen its operating margins drop by several percentage points from 2005-2007, the company still maintains higher margins than its competitors. The company attracts higher revenue projects than its competitors, resulting in more revenue per employee. The company's reputation as the premier IT services firm in India also allows it to hire new recruits at below market salaries resulting in lower compensation costs.

Lower attrition rates

Infosys' focus on high level recruits and intensive training gives it some of the most productive and effective employees in the industry. Infosys accepts less than 3% of applicants. Infosys is able to attract top level recruits with the promise of best in class training. Their training facility in Mysore is the largest corporate training facility in the world. Moreover, Infosys was one of the first Indian firms to offer stock options to its employees and has a policy of providing all employees with options. The options along with company's emphasis on ongoing training and its reputation as the top IT services firm in India, have helped the it to maintain some of the industry's lowest attrition rates.

Foreign Exchange Risks

Infosys gets the majority of its business from outside India, with 63% of its revenues coming from the U.S. in 2007. As a result, Infosys feels the impact of foreign exchange fluctuations more than most companies. In recent years, the dollar has appreciated against the rupee. Although Infosys is able to adjust its fees to compensate for a weaker dollar, continuing weakening of the dollar will make outsourcing to India less attractive to American firms. Infosys is also focused on becoming a more global firm and has hired employees in Eastern Europe as well as other parts of Asia resulting in an increase in currency risk.

Competitors

Wipro (WIT):Wipro is a major competitor for Infosys. Wipro typically earns less revenue per project than Infosys. Wipro had an operating margin of 20% in 2007. Infosys's industry leading cost efficiency helped allow it to achieve an operating margin of 27.57%. ^[10]

Satyam Computer Services (SAY):Satyam is a global IT solutions provider. It had revenues of $1.46 billion in 2007 and an operating margin of 20%. ^[11]

Cognizant Technology Solutions (CTSH):Cognizant provides custom IT consulting and technology services. Cognizant had revenues of $1.42 billion in 2006 and an operating margin of 18.2%. ^[12]

References

• Company Website

1. ↑ Seeking Alpha "The Coming Death of Indian Outsourcing" March 3, 2008
2. ↑ INFY 2007 20-F, Item 6
3. ↑ 2003 20-F, Item 6
4. ↑ INFY 2007 20-F, Item 6
5. ↑ INFY 2007 20-F
6. ↑ INFY Annual Report 2007 pg.135
7. ↑ INFY Annual Report 2007 pg. 80
8. ↑ INFY 2007 20-F
9. ↑ INFY 2007 20-F
10. ↑ Wipro 2007 20-F pg.107
11. ↑ Satyam 2007 Annual Report, pg.100
12. ↑ Cognizant 2006 Annual Report, pg.1