Friday, 10 October 2008

Infosys - looking behind the numbers

(By Anthony Miller) First let’s keep it local and see what Infosys is doing in the UK. The answer is about £114m in the July-Sept. quarter, a full 24% up yoy and 13% sequentially (at constant currency). Let’s not forget this is all organic. That gives Infosys twelve-month UK revenues of £434m, putting them very firmly in the UK S/ITS Top 20 (we’ll do the formal 2008 rankings early next year). Across Continental Europe, Infosys generated €86m in the quarter, up 28% yoy and 16% seq, a near-€300m p.a. run rate. OK, only a small base, but gaining ground at a pace.

On the broader front, Infosys management must have used the word “cautious” about twenty times during the concalls, but they are not so cautious as to freeze hiring – or anything like it. Infosys brought on another 10,000 FTEs during the quarter (net 6,000) bringing total headcount past the 100K mark for the first time. Another 4,500 FTEs are scheduled to join this quarter and management sticks by its 25,000 hiring plan for the FY (to March ’09). Attrition tricked down a tad to around 13%. Pricing remained stable.

The guidance downgrade was portrayed as a prudent measure and it sounded to me like this decision was only made in the past couple of weeks. Meanwhile, management’s unerring ability to play the margin ‘levers’ (such as utilisation, onshore/offshore mix, service mix, and several others beside) brought EBIT margins up to a shade under 30% (yes, three-zero), though currency effects did help a bit. Even so, the levers are far from fully played out and even if business drops off more than management anticipate, I can’t see this presenting a margin problem. On the vertical front, fastest growth by far came from the Manufacturing sector (+16% seq. at constant currency) though even BFSI grew 3%. Infosys won a couple of $100m+ deals in the quarter and there are another 12 megadeals in the pipeline.

I’d say the tone of the call was ‘cautious confidence’ but I fear that the tide could turn very quickly even for Infosys. And while I was on the concall, Cognizant, preemptedly reaffirmed its quarterly and FY guidance ahead of 3Q results, scheduled for 5th November (so no fireworks then?). That’s a pretty bold statement to make for the FY (obviously Q3 is already done and dusted) and management must feel hugely comfortable that there will be no drop-off in business over the next 11 weeks, even though Cognizant carries the highest BFSI exposure among the top-tier Injuns. I’ll be meeting Cognizant UK MD, Sanjiv Gossain shortly after the 3Q numbers are reported to get some insight how the local business is faring.

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