Higher volumes have led to Improvement in utilisation levels (excluding trainees). However, the fact that Infosys has added almost 5,000 employees to its base has led to utilisation (including trainees) drop to 71% (73% in 1QFY05).

Another important facet of Infosys' topline growth in this quarter is that revenues from development services have growth sequentially by 11%. While this is lower than the sequential growth of 15% in 1QFY05, it indicates an increasing focus towards discretionary spending.

Simply put, it means that clients are demanding new software development, something that has taken the backseat during the years of slowdown in technology spending. And this is a good sign for Infosys' future growth.

The company continues to witness strong growth from BPO services (Progeon) and revenues from the same have grown sequentially by 32% (24% in 1QFY05). Infosys added 32 clients in the quarter and the active client base now stands at 431.

Operating margins: Despite adding a large number of employees to its payrolls, Infosys has managed to keep its operating margins almost at 1QFY05 levels.

This is seemingly a result of the fact that the company is hiring more at the 'freshers' level, where people come at a lower marginal cost than experienced people. This is well indicated in development expenses (as percentage of sales) in 2QFY05, which, despite such a large addition to manpower, have actually reduced from the 1QFY05 levels.

However, a lower utilisation (including trainees) and rise in selling and administrative costs has slightly impacted margins in 2QFY05.

Net profits: Strong growth in other income has also, to an extent, helped Infosys report robust improvement in its net profits for 2QFY05, on a sequential basis.

This is largely a result of foreign exchange gains (Rs 64 million) that Infosys has earned in 2QFY05, against exchange losses (Rs 139 million) in 1QFY05. This is seemingly a result of depreciation of the rupee vis-à-vis the US dollar.

It must be noted that since a large part of Infosys' revenues (98.3%) are from exports and that a large part of these exports are in US dollar terms, any depreciation in the rupee's value benefits revenue and earnings growth.

What to expect?

At the current price of Rs 1,718, the stock is trading at a P/E multiple of 27.5 times annualised 1HFY05 earnings and 25.6 times expected FY05 EPS of Rs 67 per share. The board of the company has recommended an interim dividend of Rs 5 per share (Rs 3.6 in 2QFY04).

Apart from upward revision in the EPS guidance, Infosys' management has upgraded its FY05 revenue projections from 39%-40% to 47%-48%.

This upbeat guidance is based on the management's view that the company is likely to gain from the increasing move towards outsourcing as global corporations vie for increasing their competitiveness. Also, the fact that Infosys has managed to increase the number of its large size clients, points to a positive direction.

As a matter of fact, the company's $10 million+ and $40 million+ clients have increased respectively to 31 and 7 in 2QFY05 (from 27 and 5 in 1QFY05).

While valuations look stretched from a medium term perspective, investors would do well to have a long-term investment in the growth story that is Infosys.

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