Infosystematic

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It's always a pleasure to study the Infosys balance-sheet; there is enough information to allow extrapolation of thrust areas and strategic goals.

It seems that Infosys' European and Asian operations are the high-growth areas and telecom is the fastest-growth industry segment.

In Q4, 2004-05 the Infosys net profit surged 67 per cent to Rs 559 crore versus Rs 335 crore NP in 2003-04. Total income rose 47 per cent. The stock mildly underperformed market expectations in Q4, after adjustments for an extraordinary profit of Rs 45 crore on a stake sale in Yantra Corporation, a company that Infosys incubated. Post-adjustment, the NP was up 53 per cent.

Infy (plus its subsidiaries including BPO arm, Progeon) added 11,000 employees in 2004-05 to reach a total employee strength of 36,750. Only 1,500 net hires were made in Q4.

In 2005-06, Infosys expects to add another 12,500 people so, in the crudest terms, it's hoping for 33 per cent growth, if productivity and margins are maintained. Incidentally it gave no additional stock options in 2004-05.

The Q1, 2005-06 revenue growth expectations are in the range of 33 per cent at Rs 2000-2020 crore and Infy expects EPS growth of roughly 33 per cent at Rs 19.3 per share.

The 2005-2006 revenue is expected to increase 26 per cent to Rs 8890-9029 crore, while full-year EPS is expected to be Rs 84.60-Rs 85.90, a growth of 23-25 per cent.

In Q1, 2005-06, there could be a slowdown because US industry is preoccupied with meeting new financial compliance regulations. But this is likely to be temporary.

The full year 2004-05 performance was good. Revenues hit Rs 7,129 crore "" up by 47 per cent and NP before exceptional items was Rs 1,846 crore "" a growth of 48.5 per cent. The adjusted EPS hit Rs 68.79, an increase of 47 per cent.

In fiscal 2003-04, Infosys held forward contracts worth $150 million. An indication of increased environmental volatility was the hike in forex cover to $350 million, locking the rate at Rs 43.62/ USD. In 2005-06, the size of the hedge might jump again.

In segmentation terms, financial services still provides the bulk of revenues at around 35 per cent but telecom is the fast-growing segment. Revenues from the telecom industry are up by 67 per cent.

In geographic terms, a key shift took place. In 2005, revenues from North America dropped to 65 per cent of total revenues from the 2004 levels of 71 per cent and 2003 levels of 73 per cent.

Europe contributions rose to 22.3 per cent (19 per cent in 2004) and Asia (ex-India) revenues rose to 10.6 per cent. European revenues grew 74 per cent and Asian revenues grew 92 per cent while Indian revenues grew 114 per cent. But India contributes just 1.9 per cent of total revenues.

The changing geographic splits suggest that the EU penetration strategy is paying off and this will also help stablise the forex situation since the Euro is strong versus rupee and dollar.

The "de-risking" policy continues at individual client level with no client contributing over 10 per cent.

At the valuation level, the stock's trading at 30 trailing PE and 25 forward PE. Given the growth rates, that's a fair price but not a bargain. The Price-Earnings growth ratio is around 1.