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Friday, Jul 11, 2003

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Infosys: Revenue growth to the fore

Suresh Krishnamurthy

CONTRARY to expectations, Infosys has reported a 7.8 rise in profits after tax in the quarter ended June 2003 compared with the quarter ended March 2003. A combination of improved volume growth, shift in revenue mix to offshore, higher capacity utilisation and importantly, contribution from factors such as lower depreciation and other income has helped Infosys report higher profit growth.

At the operating profit level, growth was a meagre 2.3 per cent. Even this however is against expectations. Infosys had said in April 2003 that its earnings for the quarter ended June 2003 would be lower than its earnings for the quarter ended March 2003. Two factors have helped Infosys beat its own estimates:

  • Higher than expected revenue growth;

  • Marginally higher margins than estimated.

    Revenue growth for the June quarter was about 6 per cent. Infosys had anticipated revenue growth of a mere 1.8 per cent for this quarter in April 2003. This robustness in volume, especially in offshore volumes, has been the major factor in boosting profits. Infosys has also had some success in combating with rising costs. Cost optimisation along with improvement in capacity utilisation - that is the number of billed employees - helped the company restrict the decline in profit per employee. This led to the 2.3 per cent growth in operating profits. With depreciation declining and other income growing, Infosys managed to convert this 2.3 per cent growth in operating profit to a 7.8 per cent growth in net profits.

    In terms of materiality, there are changes in two factors compared to the situation in April 2003:

  • Better than expected volume growth;

  • Higher proportion of offshore revenues

    Both these factors have led to the revision in guidance for revenue and earnings growth. Revision in revenue growth target has been modest. In the case of earnings, estimated growth rate for 2003-04 has been revised from about 11.5 per cent to 16.5 per cent.

    Overall, the revision in guidance has not been substantial. That is because other material factors have not changed. Pricing pressures continue and large deals are still elusive. The environment continues to be challenging. The rupee factor also needs to be dealt with. Infosys has managed to stabilise the impact from rupee appreciation through hedging in this quarter. Still, if strengthening of rupee continues it will eat into its margins. However, there will be room for optimism as long as the volume story continues and the shift to offshore keeps gathering momentum. Infosys remains best placed to take advantage of such trends.

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