QUOTE AND NEWS
The Hindu Business Line  Aug 27  Comment 
Infosys ties up with US varsity to study changes
The Economic Times  Aug 26  Comment 
Attrition rate at the IT services firm had hit a record high of 19.5% for April-June this fiscal, up from 18.7% in the previous quarter.
The Economic Times  Aug 26  Comment 
"We’re still looking at 7-9% growth. We expect margins for the year to be around 24-25%," UB Pravin Rao, chief operating officer said.
The Hindu Business Line  Aug 26  Comment 
"Decks have been cleared for Infosys’ IT campus in Hubli," said SR Patil, Karnataka Minister for IT/ BT and Science & Technology. Patil further said, “The Infosys’ investmen...
The Economic Times  Aug 22  Comment 
These shares are valued at Rs 8,19,67,224, or $1.3 million, after Infosys shares closed at Rs 3,596 on the National Stock Exchange on Friday.
The Economic Times  Aug 22  Comment 
"The company remains solid. Growth opportunity remains very high particularly because the margin expansion in the business remains on their side."
The Economic Times  Aug 22  Comment 
Infosys is a 'BUY' call with a target of Rs 3690 and a stop loss of Rs 3565.
The Economic Times  Aug 19  Comment 
"We think the India business will revert to profitability from 2Q15 and could boost Infosys' overall margins," said Morgan Stanley in a report.
The Economic Times  Aug 18  Comment 
Many companies have traditionally resorted to buybacks and generous dividend payouts if they feel that growth is likely to falter.




 

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. 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.[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.[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 today. [4] 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 Overview

Services:

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%.[5]

Geography:

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. [6]

Business & Financial Metrics

  • 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.


Consolidated Financial Snapshot

(Rs m)

1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Sales 54,720 55,850 2.10% 102,720 110,570 7.60%
Expenditure 36,040 36,520 1.30% 69,990 72,560 3.70%
Operating profit (EBDITA) 18,680 19,330 3.50% 32,730 38,010 16.10%
Operating profit margin (%) 34.10% 34.60% 0.47% 31.90% 34.40%
Other income 2,690 2,360 (12.30%) 1,830 5,050 176.00%
Depreciation 2,220 2,320 4.50% 3,460 4,540 31.20%
Profit before tax 19,150 19,370 1.10% 31,100 38,520 23.90%
Tax 3,880 3,970 2.30% 3,750 7,850 109.30%
Profit after tax/(loss) 15,270 15,400 0.90% 27,350 30,670 12.10%
Net profit margin (%) 27.90% 27.60% 26.60% 27.70%
No.of shares (m) 556.9 573.3
Diluted earnings per share (Rs)* 110.2
P/E ratio (x)* 20.1
  • 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.


Revenue breakdown
In Rs m 1QFY10 2QFY10 Change
On basis of service offerings
Application development and maintenance 23,256 22,787 (2.00%)
Application development 10,561 10,109 (4.30%)
Application maintenance 12,695 12,678 (0.10%)
Business Process Management 3,338 3,463 3.70%
Consulting Services and Package Implementation 13,352 13,292 (0.40%)
Infrastructure Management 3,612 4,356 20.60%
Product Engineering Services 1,313 1,285 (2.20%)
System Integration 2,079 2,457 18.20%
Testing Services 3,393 3,463 2.10%
Others 2,189 2,457 12.30%
Total services 52,586 53,560 1.90%
Product revenues 2,134 2,290 7.30%
Total revenues 54,720 55,850 2.10%
On basis of client geography
North America 35,404 36,805 4%
Europe 13,516 12,957 (4%)
India 492 670 36%
Rest of the world 5,308 5,417 2%
On basis of industry vertical
Insurance, Banking and Financial services 18,058 18,710 3.60%
Manufacturing 11,218 10,779 (3.90%)
Retail 7,223 7,875 9.00%
Telecom 9,248 9,048 (2.20%)
Utilities 3,119 3,295 5.60%
Transportation & Logistics 1,259 1,285 2.10%
Services 2,681 2,793 4.10%
Others 1,915 2,066 7.90%
  • 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 significantly, 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. 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.[7]

Satyam Computer Services (SAY): Satyam is a global IT solutions provider.[8]

Cognizant Technology Solutions (CTSH): Cognizant provides custom IT consulting and technology services.[9]

References

  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 Annual Report 2007 pg. 80
  6. INFY 2007 20-F
  7. Wipro 2007 20-F pg.107
  8. Satyam 2007 Annual Report, pg.100
  9. Cognizant 2006 Annual Report, pg.1
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