Infosys’ performance for the quarter was not smooth, given the growth experienced across service offerings, industry verticals and client contribution.
MUMBAI: Infosys’ numbers for the fourth quarter ended March, 2007 (Q4), seemed to surprise the markets pleasantly at first sight, till it became clear that the sharper growth in profit was largely on account of a tax reversal of Rs 124 crore following a reassessment of tax liability. Adjusting for the same as per Indian GAAP, sequential growth in net profit, at Rs 1,021 crore, was 3.87%.
Profit growth was aided by a 102% rise in other income to Rs 119 crore. Secondly, loss on account of foreign exchange declined from Rs 20 crore to Rs 5 crore on a sequential basis. And third, the adjusted net profit (Rs 1,021 crore) was short of the Rs 1,040-1,050 crore estimated by the street. In that sense, the Q4 results can be termed mildly disappointing.
Notably, though, the company did not have any major ‘negative’ surprises for the market. Moreover, its guidance for the first quarter of 2007-08 and the year seem to have been taken positively by the market.
The stock closed the day on the BSE at Rs 2,087.60, up 2.15% over its previous close and in line with the overall mar-ket; the BSE Sensex was up 2.06%. In Q4, the company’s revenues grew sequentially by 3.2% to Rs 3,772 crore. But, as per US GAAP, its revenues (in dollar terms) were up 5.12% to $863 million.
As expected, the appreciation in the rupee impacted margins. Additionally, as per Indian GAAP, margins were also impacted due to higher growth in expenses - viz. software development (up 4.3% to Rs 2,021 crore), and selling, general and administration (SGA; up 6.3% to Rs 554 crore) during the quarter.
Some of this was offset by increases in billing rates; on a year-on-year basis, blended rates were up 6%. Operating margins thus stood at 31.73% as compared to 32.72%, down just a tad under 1%.
Infosys’ performance for the quarter was not as smooth as a straight road, given the growth experienced across service offerings, industry verticals and client contribution.
Among noteworthy points were strong revenue growth in service offerings like consulting, testing, engineering services and package implementation. Combined revenues from these service offerings, which accounted for a little less than a third of revenues, grew by 9.5% to Rs 1,192 crore; their share to total revenues increased to 31.6% from 29.7% in Q3. The top two contributors - software development (21.3% of revenues) and maintenance revenues (28.4% of revenues) - showed divergent trends.
The former grew by 9.4%, while low-margin maintenance revenues declined marginally by 1.65%. The other dampeners were products (revenues fell 8.8% to Rs 143 crore) and other services (down 7% to Rs 309.3 crore).
Geographically, North America, Europe and India saw their share decline, albeit marginally, as revenues from the ‘rest of the world’ grew strongly by 17% (sequentially); this share increased 110 basis points (100 basis points = 1%) to 9.3%, or Rs 350 crore.
Within industry verticals, revenues from the telecom segment grew by 23.5% to Rs 826.1 crore (21.9% of total revenues), the fastest by any segment. Among other major contributors, manufacturing (12.9%) and retail (10.8%) segments too grew sequentially between 4%-6%, all of which helped boost revenue growth. However, revenues from the banking and financial services industry, which is the largest contributor to revenues (29.6%), dropped by 1.5% to Rs 1,116.5 crore and nullified the gains from the other three industry verticals.
Another interesting development is the strong contribution of top clients. Revenues from Infosys’ top client (who contributed over $200 million in revenues during Q4) grew by a robust 27.1% during the quarter on a sequential basis, while the same grew by 16.3% with respect to its top 5 clients and by 11.2% for top 10 clients. What it effectively means is that Infosys has been successful in mining its top clients for higher business. In fact, the management mentioned that revenues from its top clients have been growing in double digits over the last few quarters.
Coming to a crucial aspect - employee productivity - Infosys experienced a nearly 300 basis points decline in utilisation rate (excluding trainees) to 73%. Meaning, the number of employees on the rolls but not yet billing clients went up. The company said that this was on account of a strategic build-up in its bench. In effect, this indicates expectations of stronger growth in topline in the days ahead; the lower utilisation could thus improve over the coming quarters.
The management’s guidance for Q1 in 2007-08 and statement that demand continues to be strong is also a reflection of the same. Infosys expects revenues to rise 29.2%-29.8% to Rs 3,896-3,913 crore and earning per share (EPS, before exceptional items) growth of 24.2%, or Rs 17.84 on a year-on-year basis, in the first quarter. It hopes to maintain margins, even as wage hikes (12-15% for India and 3-6% outside India) and rupee appreciation will impact margins by 300 basis points and 150-160 basis points, respectively. Visa costs, too, are generally accounted for in the first quarter and should impact margins to some extent.
On the positive side, higher utilisation rates (14 basis points for every 1% change in utilisation rates) and improved efficiencies (including SGA expenses) will help offset the negative impact on margins. The EPS growth though will be lower due to increase in equity, led by an exercise of employee stock options (about 13 million in Q4 itself; 20 million in 2006-07).
For 2007-08, revenues are expected to rise by 22.6%-24.6% to Rs 17,038-17,308 crore ($4 billion), and EPS (before exceptional items) by 20-22% to Rs 80.29-81.58 on a year-on-year basis. Marginal help should come from a reduction in losses of subsidiaries, as some of them will also emerge profitable. Notably, billing rates too are seen stable, with an upward bias and new clients are being signed at higher rates. The guidance, however, excludes large deals and acquisitions.
While acquisitions are not common at Infosys, its current cash and investment reserves at $1.4 billion and another $600 million (adjusted for $420 million capex) that will be
added in 2007-08 only raises speculation/hope on this count.
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