Financial performance (Consolidated): A snapshot...
| (Rs m) | 2QFY05 | 3QFY05 | Change | 9mFY04 | 9mFY05 | Change |
| Sales | 17,493 | 18,756 | 7.2% | 35,035 | 51,423 | 46.8% |
| Expenditure | 11,883 | 12,576 | 5.8% | 23,585 | 34,740 | 47.3% |
| Operating profit (EBDITA) | 5,610 | 6,180 | 10.2% | 11,450 | 16,683 | 45.7% |
| Operating profit margin (%) | 32.1% | 32.9% | 32.7% | 32.4% | ||
| Other income | 296 | 463 | 56.5% | 1,216 | 916 | -24.6% |
| Depreciation | 606 | 739 | 21.9% | 1,723 | 1,871 | 8.6% |
| Profit before tax | 5,300 | 5,904 | 11.4% | 10,943 | 15,728 | 43.7% |
| Extraordinary items | (1) | 4 | (89) | 3 | ||
| Tax | 826 | 934 | 13.2% | 1,770 | 2,401 | 35.6% |
| Profit after tax/(loss) | 4,474 | 4,973 | 11.2% | 9,084 | 13,330 | 46.7% |
| Net profit margin (%) | 25.6% | 26.5% | 25.9% | 25.9% | ||
| No. of shares | 267.9 | 267.9 | 266.6 | 267.9 | ||
| Diluted earnings per share* (Rs) | 66.8 | 74.3 | 45.2 | 66.4 | ||
| P/E ratio (x) | 29.7 | |||||
| (* annualised) |
What is the company's business?
Infosys is India's second largest software services exporter and has a presence in a vast array of offerings, which include software development (22 per cent of revenues) and maintenance (30 per cent), IT Consulting (4 per cent), package implementation (15 per cent), products (3 per cent) and BPO (3 per cent). Infosys' management is acclaimed for its corporate governance practices and has been a source of competitive advantage for the company in its rapid growth over the past years.
What has driven performance in 3QFY05?
Volumes drive topline: Strong sequential growth in the topline in 3QFY05 was mainly a result of growth in both onsite and offshore volumes. While the former grew QoQ by 11 per cent, the latter improved by 13 per cent.
However, there was a marginal negative bias witnessed on the billing rates front. While onsite rates decline by 0.5 per cent sequentially, offshore rates were down marginally. The management maintains that (almost) stability in billing rates is likely to continue going forward as well.
Utilisation rates (including trainees) remained at their 2QFY05 levels of 71.4 per cent. This seems a result of the fact that while the company hired a net of 2,300 employees in 3QFY05, this was almost half of what the company added in the previous quarter and was the lowest addition in the past four quarters.
Now, what is concerning is that the utilisation levels (excluding trainees) dropped by 170 basis points to 79.3 per cent during the quarter. The ultimate reason for this can be the fact that Infosys witnessed a QoQ decline in revenues from its top clients. For instance, the top client, which contributes to around 5 per cent of Infosys' consolidated revenues, witnessed a sequential 5 per cent decline in revenues during the quarter.
Revenue streams: Development disappoints, consulting enthuses!
| 2QFY05 | 3QFY05 | ||||
| Rs m | % of total | Rs m | % of total | Change | |
| Development | 4,391 | 25.1% | 4,145 | 22.1% | -5.6% |
| Maintenance | 5,108 | 29.2% | 5,646 | 30.1% | 10.5% |
| Re-engineering | 1,137 | 6.5% | 1,144 | 6.1% | 0.6% |
| Package implementation | 2,641 | 15.1% | 2,888 | 15.4% | 9.3% |
| Consulting | 525 | 3.0% | 713 | 3.8% | 35.8% |
| Testing | 997 | 5.7% | 1,144 | 6.1% | 14.7% |
| Engineering services | 350 | 2.0% | 413 | 2.2% | 17.9% |
| Business Process Management | 420 | 2.4% | 525 | 2.8% | 25.1% |
| Other services | 1,417 | 8.1% | 1,576 | 8.4% | 11.2% |
| Total services | 16,986 | 97.1% | 18,193 | 97.0% | 7.1% |
| Products | 507 | 2.9% | 563 | 3.0% | 10.9% |
| Total revenues | 17,493 | 100.0% | 18,756 | 100.0% | 7.2% |
Another important facet of Infosys' topline growth in this quarter is that revenues from development services declined sequentially by 6 per cent.
This comes after strong growth in revenues from this segment that was witnessed in the preceding two quarters. Growth in this segment indicates an increasing focus towards discretionary spending, or to put it simply, it means that clients are demanding new software development, something that has taken the backseat during the years of slowdown in technology spending.
The decline in 3QFY05, thus, comes as a surprise. However, one enthusing factor was the strong growth in the company's consulting revenues. It indicates that Infosys is finally witnessing some traction in this high-end services segment, which was missing in the past few quarters. The company added 38 clients in the quarter and the active client base now stands at 434.
Low S&M aid margin expansion: Infosys consolidated margins improved by 80 basis points to 32.9 per cent in 3QFY05. This was largely a result of the decline in sales and marketing expenses. As a per cent of revenues, these expenses were down from 7 per cent in 2QFY05 to 6 per cent this quarter.
This is a sign that the company is able to realise scale benefits of its S&M expenditure made in the past and we expect this to be a guiding force in paring the pace of margin decline in the future. Employee costs increased from 49 per cent in 2QFY05 to 51 per cent this quarter.
Higher margins and other income aid net profits: Apart from the expansion in operating margins, as discussed above, a higher other income helped Infosys post a relatively higher (than revenues) growth in its net profits in 3QFY05. This was largely a result of higher foreign exchange gains (Rs 208 mn) that Infosys earned in 3QFY05, against Rs 64 mn in the previous quarter.
Performance in the recent past...
| 4QFY04 | 1QFY05 | 2QFY05 | 3QFY05 | |
| Sales growth (%, QoQ) | 7.4 | 12.4 | 15.3 | 7.2 |
| Development expenses (% of sales) | 52.4 | 53.1 | 53.0 | 52.9 |
| Selling expenses (% of sales) | 6.8 | 6.9 | 7.0 | 6.2 |
| Operating margins (%) | 33.3 | 32.2 | 32.1 | 32.9 |
| Profits growth (%, QoQ) | 2.0 | 15.8 | 15.2 | 11.2 |
| Employees (Nos.) | 25,634 | 27,939 | 32,949 | 35,229 |
| Utilisation (%) | 70.2 | 73.4 | 71.4 | 71.4 |
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