Infosys: Trumping the street yet again

Things are extremely rosy at Infosys

Not surprisingly, Infosys Technologies has beaten consensus forecasts hands down once more. According to a Crisil MarketWire poll, Infy was expected to post a 11 per cent sequential growth in both revenues and net profit in the September quarter.

It instead reported a growth of over 15 per cent in both sales and profit. That's not all. The guidance for FY05 has been raised again - the company now expects an EPS of Rs 67 for the whole year.

Earnings growth in FY05 over the previous year is now expected to be 43 per cent, compared to the guidance of a 34 per cent growth given at the end of the June quarter, and a 19.5 per cent target set at the beginning of the fiscal.

Similarly, revenues are now expected to rise between 47-48 per cent in FY05, compared to a 24-25 per cent growth target set at the beginning of the year.

There's no doubt that things are rosy at Infosys. It's guidance for the year assumes a 7-8 per cent sequential growth in revenues in the next two quarters as well. In the December quarter, according to the company, growth could have been higher at 10-11 per cent but for the higher number of holidays in the quarter (Thanksgiving & Christmas).

In the past, Infy has been notorious for playing down investor expectations by predicting flat growth for subsequent quarters. Seen in that light, the 7-8 per cent growth target, although it's based on a conservative model, seems aggressive.

If that isn't a clear signal that the strong growth will continue in the future, consider this: Infy hired 5010 employees last quarter, an 18 per cent addition to its workforce. It plans to add another 4000-4500 employees in the next two quarters.

Another important trend that emerged last quarter was that the company got new clients at rates that were 4-5 per cent higher than its average billing rates.

In a few cases, even existing clients renewed contracts at slightly higher rates. This may not be a trend, but it can be said that the downward bias on rates has definitely ceased.

Also, there was a shift toward offshore work - offshore revenues grew 20.3 per cent last quarter, compared to a 10.6 per cent growth in onsite revenues. Utilisation (excluding trainees) rose from 79.7 per cent in the June quarter to 81 per cent last quarter.

The average rupee rate was 2 per cent lower last quarter, which added Rs 26.28 crore to the company's topline. Despite all this, margins were flat mainly because of investments related to business planning (hiring expenses, for instance).

But that's hardly a concern as the robust revenue growth is translating into high earnings growth - in the six months till September revenues grew 45.4 per cent, while earnings followed suit with a 44.1 per cent growth.

With that kind of growth expected to continue in the near-term, Infy's valuation of 25 times estimated FY05 earnings and 19 times estimated FY06 earnings doesn't seem demanding.

Investment demand to the rescue

As expected, the Index of Industrial Production in August rose a strong 7.9 per cent, with manufacturing growth being 8.2 per cent, thanks to a lower base in August 2003.

Manufacturing growth was in fact higher in August than July's 7.6 per cent only because of the base effect. Both the IIP and the Manufacturing index in August 2004 were at lower levels than in July, but that could also be due to truckers' strike.

Some analysts are forecasting a slowdown in manufacturing on the basis that a less-than-normal monsoon, and higher oil prices. But the heartening thing is that capital expenditure continues to be robust, with the Index for "Machinery and Equipment other than Transport Equipment" rising by 26.3 per cent in August.

That's lower than July's sizzling 30.2 per cent, but is nonetheless comforting. This index is up 27.7 per cent this fiscal. To put that in perspective, that's the highest rate of increase in the last decade.

Prior to the current year's record rise, the highest growth in this index was in 1995-96, when it rose by 18.7 per cent. Spending on capex should also be able to offset the impact of lower agricultural growth.

In 1995-96, the manufacturing index rose by a huge 14.1 per cent, the IIP was up 13.1 per cent, and GDP growth was 7.3 per cent, despite negative growth of 0.9 per cent in agriculture.

With contributions from Mobis Philipose