Infosys Tech presages margins under pressure

Infosys Technologies may not sustain its profit margins owing to pricing pressures, appreciating rupee and wage pressures, according to its filing with the US Securities and Exchange Commission.

The filing on the proposed American depository receipts (ADR) issue on Tuesday, also said that during the financial year 2003, the company began to incur substantially higher selling and marketing expenses to increase brand awareness.

In fiscal 2003 and 2004, its net income was 25.4 per cent and 25.9 per cent of total revenues compared with 30.1per cent of total revenues in fiscal 2002.

"This decrease reflects pricing pressures for our services, volatility of the rupee against the dollar and increased wage pressures in India. In fiscal 2003, we began to incur substantially higher selling and marketing expenses as we invested to increase brand awareness among target clients and promote client loyalty and repeat business among existing clients," the filing said.

Since a majority of its revenues are dollar earnings and a significant part of the costs are in rupees, currency fluctuations with the rupee appreciating against the dollar will impact adversely, it said.

"Changes in exchange rates may have a material adverse effect on our revenues, other income, cost of services sold, gross margin and net income, which may in turn have a negative impact on our business, operating results and financial condition," said the company in its filing.

The company has, however, tried to reduce the effect of exchange rate fluctuations on operating results by purchasing foreign exchange forward contracts to cover a portion of outstanding accounts receivable.

Fuelled by increased spending on technology products and services, large US multinationals are establishing larger offshore operations in India, resulting in wage pressures for Indian companies, noted the filing.

The company observes that wages in India are increasing at a faster rate than in the US, which could result in increased costs for technology professionals, particularly project managers and other mid-level professionals.

In addition, India has shown the highest average wage increases in Asia-Pacific in 2004, particularly in the technology sector.

Compensation increases to control attrition may result in a material adverse effect on its business.

Infosys is planning for a second sponsored American depository share issue that would consist up to a maximum of 16 million equity shares, including the greenshoe option. This was endorsed by shareholders last week.

In its filing to the SEC, Infosys gave an indicative maximum offering price per unit of $69.90 which translates into an issue size of $1.11 billion.

Its revenues grew from $203 million in fiscal 2000 to $1,063 million in fiscal 2004, representing a compound annual growth rate of 51.3 per cent. Net income grew from $61 million to $270 million during the same period, representing a compound annual growth rate of 45 per cent.