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Infosys Technologies: Pare exposures/Re-enter at declines

Krishnan Thiagarajan

INFOSYS Technologies recorded a robust sequential revenue growth of 12.42 per cent in the first quarter of 2002-03, exceeding the management guidance on revenues for this quarter by a long chalk. Compared to a projected income from software development services and products of Rs 684-694 crore, Infosys clocked an actual income of Rs 764.62 crore in this quarter.

According to the senior management, a step-up in orders from existing clients and around 400 project starts (at different stages of execution) have bolstered revenue growth in 2002-03 first quarter.

However, this improvement in revenues was attributed to outsourcing decisions taken by American companies in the first two months of the quarter — April and May. But, owing to Indo-Pak border tensions, the business decision-making had virtually come to a halt in June. And the effects of that were being felt even in July.

To compound matters, June also turned out to be the month in which the US economy suffered a crisis of confidence — rocked by a series of accounting scandals, corporate collapses, gaping regulatory loopholes and a flurry of lowered revenue outlook from technology majors. In addition, most of the technology chieftains in the US also reiterated that technology spending was unlikely to recover before end-2002.

As the US economy braces itself for another round of turbulence, corporate decision-making may once again slow in the second and, probably, 2002-03 third quarter. In this challenging environment, the Infosys management has projected revenues of Rs 762-781 crore (-0.34 per cent to 2.14 per cent) for the second quarter of 2002-03. And this suggests that the billing rates, which had shown signs of improving in the first quarter of 2002-03, may come under pressure again.

Pressure on margins: In 2002-03 first quarter, the operating profit margins (OPM) of Infosys suffered a 3.31 percentage point decline to 35.96 per cent over the corresponding previous period. After remaining quite stable through a tough 2001-02, the OPM staged a sharp decline for the first time in the last few quarters. This decline was attributed to a sharp increase in sales and marketing expenses and an increase in software development expenses on account of a rise in onsite projects in this quarter. In a quarter in which business volumes staged a major rise, Infosys almost doubled its investment in sales and marketing expense to Rs 55. 09 crore from Rs 27.65 crore over this period.

Despite the other income staging a 84.6 per cent jump to Rs 24.90 crore, the sharp increase in sales/marketing expenses and higher provision for taxation put the brakes on post tax earnings growth. Post-tax earnings grew 14.1 per cent year-on-year and only 3.1 per cent on a quarter-on-quarter basis. The only notable feature in this quarter's performance was the sharp rise in employee utilisation (excluding trainees) rates by 7.3 per cent to 80.2 per cent on a sequential basis. Signalling a positive trend for offshore outsourcing in the future, Infosys added 566 employees (excluding lateral hires) during the first quarter of 2002-03 vis-a-vis 75 employees added in 2001-02 fourth quarter. It also proposes to add another 800 fresh recruits in the second quarter of this year.

Investment recommendation: Based on the trailing 12 months per share earnings of Rs 126.17, the Infosys stock trades at a price-earnings multiple of 26 times. In the backdrop of an uncertain and challenging business environment in the US in the second quarter, shareholders may contemplate cutting exposures in the stock at current price levels.

As a clearer picture emerges on technology spending and outsourcing decisions by US companies, investors may consider re-entering the stock at declines, probably in the post-second quarter earnings announcement phase.

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