| On a revenue base of Rs 9521 crore in FY06, Infosys has said it hopes to post a 30 per cent growth this fiscal. Besides, it hopes to grow net profit by 26-28 per cent on net profit of Rs 2,458 crore (after a 35 per cent y-o-y growth in FY06), translating into an EPS of Rs 114-116. |
| The positive outlook on a high base is encouraging especially since Infosys is known for its conservative guidance and has built in wage inflation and flat billing rates. |
| The confidence appears to stem from the company being able to ramp up its accounts: it now has 221 accounts of over $1 million and 9 clients with billings of over $50 million. |
| Meanwhile, the company definitely faces pressures on operating margins. Operating profit margin is down 230 basis points sequentially to 31.7 per cent in Q4 FY06 owing to an appreciation in the rupee, which hit margins by 130 basis points, higher depreciation of 90 basis points as also higher than anticipated employee additions. This is despite a slight increase in the blended billing rate of 70 basis points. |
| Utilisation levels slipped marginally in the quarter because of higher-than-expected employee addition, though the management believes it will improve going forward. |
| The consulting business too slowed down and may take a slightly longer time to break even than earlier expectations. Progeon, the BPO subsidiary, posted revenues of Rs 378 crore in FY06, with an operating margin of 24.6 per cent, which is expected to be maintained in FY07 on a revenue growth of around 45-50 per cent. |
| While the reasonably good demand for offshoring would keep revenues strong, the company could face margin pressures on account of wage inflation. |
| At the current price of Rs 3,000, the stock trades at 26 times FY07, which is lower than the growth potential, and therefore is attractively valued. |
| Crisil: Margins fall |
| The key takeaway from Crisil's March 2006 quarter is that its efforts to develop alternative business segments to compensate for the difficult environment in its rating business could not prevent a fall in operating profit margins. |
| The consolidated operating profit has fallen nearly 15.7 per cent y-o-y to Rs 10.06 crore in the last quarter. |
| However, the results are not strictly comparable with the corresponding previous period, as the Irevna acquisition has been included only from the June 2005 quarter. |
| Nevertheless, the consolidated entity saw its operating profit margin fall a staggering 1321 basis points to 18.7 per cent in the March 2006 quarter. |
| In the ratings business, Crisil's senior management explained that the performance was adversely affected as there was just one bond offering in the March 2006 quarter. |
| As a result, the segment performance fell a staggering 76.5 per cent y-o-y to Rs 2.63 crore. The decline in rating business was compensated to an extent by the research and information services business, which saw its segment profit rise by 51 per cent over the December 2005 quarter. |
| The demand for its research was strong, given the buoyant market, growing mutual fund industry and outsourcing. |
| Though the advisory business saw a top line growth, its segment profitability declined compared with March 2005 quarter. |
| Pressure on operating margins has also been compounded by the ramping up of employees in Crisil's research and information services, with the headcount rising from 638 to 1349 in FY06. Staff expenses jumped 123.6 per cent y-o-y to Rs 21.76 crore in the March quarter. |
| Going forward, the research and information services business should at least drive Crisil's growth but it will not match the operating margin of its rating business, where the company is a dominant player. |
| Though the estimated CY06 earnings discount the stock price of Rs 1683 about 26 times, the stock may continue to trade at a premium to the market, given the opportunities in the research and information business. |
| With contributions from Shobhana Subramanian and Amriteshwar Mathur |
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