Beating the Street

While revenue growth may taper off in coming quarters, pricing environment will be stable.

With sequential revenue growth of 14.4 per cent to Rs 3,451 crore and a 260 basis points increase in operating profit margin to 32.1 per cent, Infosys has turned in splendid numbers for the September quarter.

It's not surprising that the company has revised its guidance upwards by about 4-5 per cent and now hopes to post revenues of Rs 13,853-13,899 crore for FY07, a y-o-y growth of around 46 per cent.

That it has added a record 10,795 employees this quarter is an indication of how confident the company is of being able to deliver strong numbers going ahead.

Also it's clear that the arrival of foreign competition in the form of an Accenture or IBM is yet to impact Infosys, except possibly to the extent that attrition is up at around 13 per cent for services from around 11.9 per cent in the June quarter.

The strong volume growth of 11.2 per cent q-o-q (compared with 8.5 per cent in Q1 FY07), is evidence that Infosys is able to cash in on the good operating environment.

While ITspend overseas is not going up, offshoring continues and the management believes that the environment is certainly better than it was a year back.

As such, while revenue growth may taper off in the coming quarters owing to specific reasons, with the pricing environment stable""-the company is able to get 3-4 per cent higher billing rates from new clients and 1-2 per cent from renegotiations with existing clients""it should not lose much momentum.

The margin expansion is a combination of lower visa fees paid out (110 basis points), rupee depreciation of 1.4 per cent (90 bps) and lower SG&A(50 bps).

For the full year, margins should be in the range of last financial year's levels of 31.5-32 per cent. The lower utilisation of 68.7 per cent is on account of the large number of new employee additions.

While the China venture will be in investment mode even next year, the consulting business, which has grown faster than the company in this quarter posting a 29 per cent sequential growth, should break even in the next two to three quarters.

Infosys BPO grew 21 per cent sequentially and posted operating margin of 22.6 per cent now has close to 10,000 employees. At the current price of Rs 1,980, the stock trades at around 30 times estimated FY07 earnings and around 24 times FY08 earnings. Given its track record, the stock should outperform.

IGate: Better margins

iGate Global Solutions (IGS) surprised the investing community with a fine set of numbers. Though the company had made serious efforts on the business front, its financials had only been mediocre thus far. With this quarter's performance, IGS seems to have moved out of its sluggish phase and the future outlook looks brighter.

IGS saw its top line growing by 11.6 per cent q-o-q in the September 2006 quarter, due to a 10 per cent growth in IT services, with a 4.8 per cent volume growth.

While its gross profit went up by 22.9 per cent q-o-q, operating profit increased 55.7 per cent as it was able to manage costs better. Operating profit margin also improved by 280 basis points over the June quarter to 9.9 per cent.

Better margins from new customers that the company acquired in the past few quarters, higher utilisation rates (offshore utilisation improved by 100 basis points q-o-q and onsite utilisation increased by 400 basis points) and better efficiencies led to the rise in margin. Offshore billing rates went up 1.6 per cent while onsite billing rates rose 1.5 per cent.

During the quarter IGS increased its holding in Loan Pro, US, from 5 per cent to 60 per cent, and will transition its business to India. Its largest customer, GE, also renewed its contract till 2009.

The company targets an operating profit margin of 15 per cent in the March 2007 quarter, and expects cost savings to contribute 2.5-2.7 per cent and the rest through better margin business. The management is satisfied with the demand side of the business, which had been a challenge in the past.

Now, the company plans to address the supply issue of hiring and retaining employees, and as a first step, it has introduced restricted stock units for employees. After the results, the IGS stock was up 20 per cent, and it now trades at about 16-17 times FY07 earnings, given the improved financial performance.