Infosys: outlook positive

Infosys Technologies Ltd is foraying into new segments in IT space to boost growth.

The Bangalore-based IT giant has significantly invested in new areas such as BPO with its subsidiary Progeon and system integration services which should start yielding results in the next few years.

Infosys is also planning to set up a wholly-owned software development centre in China at an investment of $5m (having invested about US $1m so far). The subsidiary will be aimed at tapping local Chinese companies and MNCs operating in China.

Currently, most Indian IT services companies are doing the bulk of their offshore software development work out of India (with about 75 percent staff based in India). Infosys feels that setting up development centres in China would help it moderate its risk profile and gain access to Chinese talent in the long term.

The company has been successful in winning small/mid sized IT outsourcing orders in the range of $5m-15m per annum but feels that it could win large deals as it gains expertise in executing IT outsourcing assignments.

Infosys generates quarterly free cash flow of Rs 3 billion and along with its strong balance sheet it could go for large investments or acquisitions. The company has invested $46 million in the past 3 quarters on capital expenditure.

Market analysts feel that the company's investment on capex would be about $25m in this quarter, much lower than management guidance of $50m-plus.It added 30 clients in Q3 of 2003-2004 making a total of 357 active clients four of which have annualised billing of $40m.

Infosys' average annual revenue per client is about $3m, which indicates its lower client penetration given that most of the clients are fortune 1000 companies. Accordingly, it has been increasing service offerings and setting up client proximity centres.

Infosys is planning to augment its 20,660 seats at the end of third quarter of the financial year 2004. In the next six months it plans to add another 7,300-seat. Analysts feel that high wage inflation will continue at the middle management level.

Strong offshore volume growth is expected by IT services companies and aggressive expansion by MNC IT companies in India would mean greater demand for skilled software engineers in the medium term. In October, Infosys increased salaries by 10-15 per cent for its offshore employees and.a further salary increase of 7-10 per cent in April 2004, while the salary rise at the middle management level could be higher at 15 per cent.