The relatively depressed growth outlook for Infosys is attributable to the following factors.

Technology spending

The senior management of Infosys has reiterated that the global technology spending for 2002 is likely to remain flat. This essentially means that the technology overinvestment, which had taken place between 1998 and 2000, will take at least three to four quarters to be completely wiped out.

And till that happens, the possibility of near-term recovery in demand appears rather slim.

For investors looking for signs of recovery, the key indicators may be a steady flow of proposals for consulting, particularly new projects (from the definition stage) or newer R&D initiatives across different vertical segments.

Revenue lag

Even though there are positive indications from the Federal Reserve about the recovery of the US economy, the first round of earnings performance from IT companies in the US still shows extreme pressure on revenue and earnings growth.

Hence, even if the US recovery gathers momentum, it may take at least three quarters to translate into significant revenue growth opportunities for the Indian offshore outsourcing industry.

Infosys has indicated that its growth in 2003 will be dictated largely by "volume growth" (in line with trends in 2002) as it expects pressure on billing rates to continue. This has partly to do with slack demand from end-users of technology and to some extent, with excess capacity built up by the Indian software industry.

Long decision cycles

It can hardly be disputed that offshore outsourcing is increasingly being accepted worldwide and large-scale vendors such as Infosys are likely to benefit in the long run.

But in the short run, the decision/sales cycle (time taken to progress from the request for proposal (RFP) stage to the closing of a contract) among clients continues to remain long.

Client ramp-up slow

Infosys has managed to broadbase its addressable market space to include Global 2000 companies and enhanced the client additions every quarter (including the fourth quarter of 2001-02) over 2001-02.

But the ramp-up of projects from different clients, after trial runs and specific initiatives, have been rather slow and long. This, along with long decision cycles, account for the slow revenue and per share earnings growth projected by Infosys for 2003.

Q4 and full-year performance

Infosys has managed to exceed the revenue forecasts for the year 2001-02 by recording total income from software development and products of Rs 2,603.59 crore as against a forecast of Rs 2,560-2,584 crore.

Its per share earnings at Rs 122.12 also marginally exceeded the upper end of the EPS forecast of Rs 120-122. The operating profit margins (OPM) dipped marginally by 0.39 percentage points to 39.85 per cent for the year vis-a-vis the previous year.

Infosys' fourth-quarter performance was also on similar lines. It clocked total income of Rs 680.13 crore (2.92 per cent quarter-on-quarter growth) which was higher than the forecast of Rs 630-660 crore.

The per share earnings at Rs 31.78, however, fell in the higher end of the forecast band of Rs 30-32 per share. However, for the fourth-quarter, its OPMs have dipped more sharply by 1.72 percentage points to 39.81 per cent over the corresponding period of the previous year.

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