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Infosys margins dip despite 125% net growth

NetScribes/Abhijit Basu

The market expectations were stratospheric, but Infosys Technologies just about met them for the December quarter. Infosys reported a 125 per cent rise in net profit to Rs 1.66 billion and a 137.2 per cent rise in net sales to Rs 5.37 billion for the quarter.

But with heady growth rates becoming the norm, analysts are pointing out towards the dipping operating and net profit margins as a reason for some amount of concern. Infosys's operating profit margin dipped in the December quarter to 40.75 per cent from 43.49 per cent in the year-ago period, while its net profit margin dipped to 30.97 per cent from 32.59 per cent over the same period.

What the market is overlooking is that the software services business is a people-intensive one and assumes a certain minimum level of 'bench strength', which impacts the margins adversely. Infosys has added 985 people to its rolls in the latest quarter to take its total headcount to 8,910. Comparably, on December 31, 1999, the company had a total headcount of 4,996.

In terms of bench strength, Infy's utilisation rate in the December quarter stood at 77.6 per cent, compared with 80.5 per cent in the preceding quarter. What it also means is that Infosys is in a better position to increase its sales velocity, as it can deploy people faster on new projects.

However, many analysts are discontent with the fact that Infosys has not spelt out how it is planning to maintain its high growth rates in the future. More so in the light of recent warnings about declining competitiveness (read billing rates) for Indian software companies.

"The company management is giving out qualitative statements rather than quantitative ones. Saying that the clients have pledged more business makes no sense unless there are clear numbers in place. This does have a role in the market reacting to the results," said a senior analyst at Span Capital Services.

"Infosys had posted better-than-expected results so far. But the latest one is just at par. With expectations rising by the day, disappointments are bound to happen," he said. Moreover, lack of any clarity on the billing rates, the recent issue of debate has also disappointed analysts.

Highlights of the December quarter performance include a decline in the revenue contribution from 'pure dot-com' clients to 5.8 per cent from 9.5 per cent in the September quarter. Also, the net profit is after a write-off of investments to the tune of Rs 130 million in US-based B2B service provider EC Cubed Inc, following its liquidation. Still the company raked in more from the Internet sector as a whole - 28.3 per cent of its revenues this quarter against 15.6 per cent a year back.

The contribution of the banking, insurance and financial sectors rose to 36.6 per cent from 29.7 per cent, while the telecom sector's contribution grew to 17.7 per cent up from 14.5 per cent in the year-ago quarter. This growth was offset by a dip in revenues from the manufacturing sector, which stood at 16.7 per cent this quarter, against 24.4 per cent for the corresponding previous period. Rising staff costs (up 131.6 per cent to Rs 1.9 billion) also contributed to the decline in profits and margins.

Noticeably, the company's staff costs have zoomed 131.6 per cent to Rs 1.9 billion for the quarter. However, analysts felt that the company's new recruits will take some time to start delivering results. "Most of the people taken on board are trainees and will undergo 2-6 months of training before they actually start contributing to the company's bottomlines," said the Asit C Mehta Brokerage analyst.

"This could be one of the primary reasons that the bottomline growth will be slower than the topline growth in the next two quarters," he added.

Infosys dipped Rs 83.95 to close at Rs 5923.20 on the BSE on Tuesday, down 1.41 per cent from its previous close, on a volume of over 1.24 million shares.

At its current market price, the scrip is trading at a forward earnings multiple of 68 times at an annualised EPS of Rs 88 for FY01.

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