The Hindu Business Line : Unscathed so far, by US troubles

A tighter rein on expenses, a better service mix and an active hedging programme to manage rupee volatility have helped Infosys Technologies close 2007-08 with profits and revenues that have bettered its own guidance. While revenues for the year have grown by 20.1 per cent to Rs 16,692 crore, net profits have expanded by 20.8 per cent.

Levers at work

Importantly, SG&A (selling, general and administrative) expenses have fallen during the year, indicating effective client mining strategies. This is supported by a 97-per cent repeat business level. The year has seen Europe, a market with substantial potential, enhancing its contribution to revenues from 26.4 to 28.1 per cent, while the contribution from North America has declined to 62 per cent.

Application development and maintenance (45.4 percent), a low margin service, remains the chief contributor to overall revenues; but has reduced its contribution by 3 percentage points compared to last fiscal. Services that carry higher billing rates, such as package implementation and consulting, have increased their contribution. The management has indicated that Infosys Consulting (a subsidiary) may break even by next year. Infosys has also taken an ‘asset-light’ approach in the infrastructure management services. Combined, these trends could improve realisations for Infosys in the coming year.

Infosys has also reduced dependence on the troubled BFSI vertical (35.7 per cent of revenues), with telecom, manufacturing, and retail verticals pegging up contributions. This paves the way for more broad-based growth. The increase in the proportion of fixed-price billing contracts may lend better predictability to cash flows and help margins.

Outlook

Infosys has guided for a revenue growth of 19.2 per cent and an earnings (EPS) growth of 16.3 per cent to Rs 92.32 (at the lower end of guidance) for the current fiscal. These appear achievable in the light of business prospects and the flexibility available on operational levers such as utilisation and volume growth. This guidance assumes no increases in billing rates; so any price increase achieved may lend an upside to revenues and earnings. The company also hopes to reduce its onsite component steadily. As these are high-cost revenues, if such projects are migrated offshore, it may enable optimisation of manpower costs.

Macro concerns remain

Concerns about global IT spends have been on top of mind for investors in IT stocks. In this respect, Infosys has indicated that while there is a slowdown in the IT budgets of BFSI clients, there have been no deal cancellations. 76 per cent of clients have reportedly indicated a flat budget.

The other concerns relate to wage inflation (11-13 per cent offshore and 4-5 per cent onsite this year) and higher tax incidence (over 15 per cent) which may lead to a muted June quarter.