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Infosys: too conservative?

Jens Butler | July 29, 2009
A common theme in the offshore industry today is flat or falling revenues, and Infosys is no exception.

Infosyss first-quarter results showed a better than predicted 2.9 per cent drop in revenues over 4Q09, to US$1,122 million, but came with cautionary statements of continuing revenue drops. On the back of a cost-management campaign, net income has increased by 1.6 per cent year-on-year, but fallen on the previous period. Infosys remains a leader in protecting its margins, but is it doing enough to grow in the future?

Margin management the saviour

A common theme in the offshore industry today is flat or falling revenues, and Infosys is no exception. However, since April 2009 Infosys has been proactively preparing the market for such results by forecasting that revenues for the next periods will drop by between 3.1 per cent ($4.45 billion) and 4.6 per cent ($4.52 billion) compared to FY09 hence the minimal share price impact that this 2.9 per cent revenue fall has had.

This has enabled Infosys to have a greater focus on managing its margin base. Headcount reduction of 2,100 in 4Q09 and a further 945 in 1Q10, and halving of travel costs, has driven an overall cost reduction of almost 8 per cent in the period.

However, with a continually falling utilisation rate, hovering just above 70 per cent, and a very high proportion of revenues emanating from T&M contracts (61.9 per cent, albeit down from 67 per cent 12 months ago), Infosyss traditionally high margins may become impacted if this trend continues. Headcounts have been reduced, but there is a serious balancing act required by the management now: continue to be prepared for the return of growth by maintaining a certain headcount level or take heed of its own predictions of an upturn not occurring until mid-2010 and therefore become more ruthless in this area.

A positive client exposure shift, but government is still a concern

An area that has raised concern amongst a number of industry watchers is the fall in revenues from Infosyss largest client, BT. Revenues from BT fell from 7.9 per cent to just 4.5 per cent on the back of its own 2030 per cent IT budget cuts.

However, we believe this is part of a positive trend in reducing its dependence upon this client, and with deals such as the $100 million deal at Telstra we are starting to see a greater distribution amongst a larger number of smaller revenue contributors. When tied together with a relatively consistent repeat business figure of 9699 per cent and continuously falling accounts receivables (down to 56 days, from 72 in March 2008), this bodes well from a risk-management perspective. In addition, Infosys has managed its client base well, losing only ten active clients and adding 27 during this most difficult of quarters.


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