Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday

Biz model helps Infy beat the street

Biz model helps Infy beat the street
Comment E-mail Print Share
First Published: Tue, Jan 13 2009. 11 53 PM IST

Updated: Tue, Jan 13 2009. 11 53 PM IST
Bangalore: Executives at Infosys Technologies Ltd have always claimed that their company is equipped to thrive in tough market conditions because it can keep costs down, has a model that is profitable even when it is not using as many of its employees as it ideally should be, and signs contracts at billing rates higher than its rivals—or walks away from such deals.
Click here to watch video
/Content/Videos/2009-01-14/1301_Rahul Disco_Infy_MINT_TV.flv
On Tuesday, in the background of a slowdown in the US and Europe, the main markets for Indian IT firms, the company translated this talk into better-than-expected results for the quarter that ended 31 December, albeit with a little help from the dollar, the currency in which Infosys and other Indian software firms bill their clients.
The stock markets cheered the numbers that came despite a fall in billing rates and near-flat growth in volume of business and in the wake of the corporate fraud at Satyam Computer Services Ltd, an Infosys rival whose chairman disclosed last week that he had falsified books, over the years, to the tune of at least Rs7,136 crore. They also came soon after the World Bank announced Monday that it had barred Infosys’ cross-town rival Wipro Ltd from doing any work for it in 2007.
Infosys’ revenue for the quarter, at Rs5,786 crore, was 35.5% higher over that for the same quarter last year and 6.8% higher than revenue for the September quarter; and its net profit at Rs1,641 crore was 33.3% higher year-on-year and 16.4% higher quarter-on-quarter.
Also See Better Than Expected (Graphic)
The consensus numbers in a Mint poll of eight brokerages on Monday was revenue of Rs5,704 crore and a net profit of Rs1,521 crore. The company itself had projected that its revenue could be between Rs5,519 crore and Rs5,730 crore. On Tuesday, Infosys said it would hire 2,000 more people than initially estimated in the year to March. Its net profit margin, a measure of profitability which is simply the net profit expressed as a proportion of sales, was 28.36% in the quarter, 1.93 percentage points higher than the net profit margin of 26.43% in the September quarter.
Infosys did lower its guidance on revenue in the three months to March because of the recession in the US, but that didn’t seem to matter much to the markets. Shares of Infosys rose 6.36% on the Bombay Stock Exchange to end the day at Rs1,230.2. Infosys helped the sector index gain 4.71% to end the day at 2,147.69 points on a day when the exchange’s benchmark Sensex index closed down 0.42% to end the day at 9,071 points.
The company said consolidated revenues in the fourth quarter in dollar terms would be in the range of $1,128-1,170 million (Rs5,482-5,686 crore now) indicating a year-on-year decline of 1.2% or a possible growth of 2.5%. The company also trimmed revenue projections for the year to March and said this would grow by 11.8-12.8% in dollar terms, down from October’s forecast of 13.1-15.2%.
How does Infosys do it?
Creating value: Infosys CEO and MD S. Gopalakrishnan. Hemant Mishra / Mint
Infosys’ chief financial officer V. Balakrishnan attributed the company’s performance to a business model made for tough times. “We have a better variable cost structure, better financial model in tough times—it will help us to overcome any impact. The volume was 2% (this quarter), the environment is bad and the pricing came down by 1.8% sequentially. But we have still been able to maintain margins,” said Balakrishnan.
A variable cost structure refers to one where costs are related to the volume of business and rise with more business and fall with less. In contrast, they stay largely the same in a fixed cost structure.
Infosys expects customers in the US to move more work offshore to low-cost locations such as India. The Bangalore-based firm also pursues higher margin contracts and rejects those that would not generate operating margins of at least 30%.
“In a challenging environment, our focus is on creating value for clients, running an optimized business and evolving our business model that will allow us to emerge stronger when the global economy starts recovering,” said S. Gopalakrishnan, CEO and managing director of Infosys.
Can it continue doing so?
Analysts say Infosys will continue to do well or moderately well, but predict that the company could be in for some tough times.
“Infosys results are a mix of weak revenue performance and prognosis, and strong margins. Given that margin performance is entirely currency led, we think the focus should remain on the top line, where weak trends persist,” said International brokerage firm CLSA Asia-Pacific Markets, in a note to clients.
That view was seconded by Vinu George, an equity analyst at Mumbai’s Edelweiss Securities Ltd, who said in a note to clients that the quarter had “thrown more negatives than positives from a forward-looking perspective”.
“A 2% revenue decline guidance in Q4 FY09, an implied flat FY10 on revenues (US$) by annualizing Q4 FY09, sharp pricing decline and excess Ebitda (earnings before interest, taxes, depreciation and amortization) margins, which we ironically view as negative means that Infosys and the industry is entering into a period of more intense difficulty,” George added.
However, not everyone sees it this way. “There will be pressure on financials over the next two to four quarters, but we don’t see a case where you start seeing exceptionally poor and weak performance,” said Gaurav Dua, head of research at Sharekhan Ltd, a Mumbai brokerage.
An analyst said it was unlikely that the Indian software sector would mirror Infosys’ results. “I don’t think it will be reflected in the sector as a whole, but maybe in (the) results of some companies. But Infosys will maintain margins, which it has sustained so long,” said Apurva Shah, head of Research at Prabhudas Liladhar, a Mumbai brokerage
Wipro Ltd is scheduled to declare its results on 21 January, Tata Consultancy Services Ltd on 15 January, and HCL Technologies Ltd on 23 January.
Graphics by Sandeep Bhatnagar / Mint
Comment E-mail Print Share
First Published: Tue, Jan 13 2009. 11 53 PM IST