Infosys: strong results but warnings about future earnings

IT consulting services major, Infosys Technologies, failed to prevent a slide in its share prices despite posting a 112.70 per cent top line growth coupled with 117.98 per cent bottom line growth in fiscal 2001.

Total income, for the year ended 31 March 2001, was placed at Rs 1,959.94 crore and net profit at Rs 623.32 crore in comparison to corresponding period’s figures of Rs 921.46 crore and Rs 285.95 crore respectively. Net earnings per share on an equity capital of Rs 33.08 crore rose more than 100 per cent to Rs 95.06 as against Rs 44.38 in the previous year.

Infosys has also had a strong quarter ended 31 March 2001. Total income at Rs 572.08 crore in the fourth quarter was up by 100.03 per cent over the corresponding period’s figure of Rs 286.00 crore. Net earnings per share, on an equity capital of Rs 33.08, rose more than 100 per cent to Rs 27.46 as against Rs 14.12 in the corresponding quarter.

The basic reason for the slide in stock valuations is a statement issued by Mr Narayana Murthy, chairman and chief executive officer which stated, "We had a strong quarter but with the economic environment in North America becoming challenging, we estimate a revenue growth rate of 30 per cent for fiscal 2002."

The markets, true to their characteristic, dumped the Infosys stock, which lost almost 25 per cent in two days to fall and close below the 3,000 level for the first time in twenty-four months. By the time trading closed on 12 April, Thursday, the Infosys scrip had already shed 12 per cent to close at Rs 2,849.85 after touching an intra day low of Rs 2,720.65.

Infosys has substantially lowered its earnings estimate for the quarter ending 30 June 2001 and for the year to end on 31 March 2002. Total income, for the quarter to end on 30 June 2001, is expected to be between Rs 580 crore and Rs 590 crore and earnings per share anywhere between Rs 27 and Rs 28. Similarly, for the year to end on 31 March 2002, Infosys has projected its total income to fall anywhere between Rs 2,500 crore and Rs 2,560 crore and earnings per share between Rs 118 and Rs 121. Therefore the slowdown is for real now!

During the quarter ended 31 March 2001 Infosys acquired 37 clients, highest ever in any one quarter and continued to strengthen its it relationship with Fortune 1000 companies across the globe. However economic conditions continue to remain uncertain in the USA. Says Nandan M Nilekani, managing director, president and chief operating officer of Infosys, " We are in constant touch with our clients. Several of them face uncertain economic conditions. Our addition of 37 new clients is the highest ever during a quarter. These clients win were especially in the financial services and manufacturing sectors. We have a resilient business model that can meet the challenges thrown by changing market conditions."

However, Infosys’ operations in Europe acquired new momentum with the percentage of revenues from the region going up from 18.8 per cent last quarter to 20.5 per cent this quarter. For the full year revenues from Europe amounted to 18.8 per cent as compared to 14.8 per cent in the corresponding period. "With expansion in countries such as UK, Belgium and Germany, Europe is emerging as a key market for Infosys." The quarter saw Infosys acquiring two new significant clients in Europe --- Monsanto, a leading global provider of technology-based solutions and agricultural products and Telenet, a premier telecommunications company based in Belgium.

The last quarter also saw Infosys sign up several banks world-wide for its banking products. It is partnering with the Indian operations of ABN Amro for replacing its existing IT platform with a new generation e-commerce solution. It has also entered into a partnership with Standard Trust Bank, the sixth largest in Nigeria, for implementing its IT architecture based on web paradigm. IDBI Bank has signed up Infosys for deploying FINACLE e-age banking solution as part of its IT initiative for driving its business. Punjab National Bank, the largest public sector bank and the second largest amongst all banks in India, has signed a strategic IT partnership with Infosys.

Cash and cash equivalents during the year increased by Rs 69.37 crore during the year, from Rs 508.37 crore to Rs 577.74 crore, after incurring capital expenditure of Rs 463.35 crore. Operating cash flows, for the quarter ended 31 March 2001 were Rs 186.84 crore and for the year ended 31 March 2001 were Rs 541.23 crore, the corresponding period’s figures being Rs 101.02 crore and Rs 249.48 crore. "We have a comfortable cash position at the end of the year, which enables us to meet our strategic objectives in a dynamic market environment," said TV Mohandas Pai, director finance and administration and chief financial officer. He added, " We continue to focus on risk management, cost control and maintaining margins. Our business model enables us to aggressively invest for the future while maintaining liquidity without materially compromising on the margins."

Infosys increased its employee strength to 9,831 as on 31 March 2001, up from 8,910 as on 31 December 2000 and 5,389 as on 31 March 2000. The strength of software professionals as on 31 March 2001 increased to 8,656 from 7,824 as on 31 December 2000 and 4,623 as on 31 March 2000. Net addition to employees during the quarter was 921 as compared to 985 during the quarter ended 31 December 2000. Says K Dinesh, director, human resources development, information systems, quality and productivity, " We continue to focus on hiring middle level managers, who will be crucial for our growth in the years to come. We have built a strong hiring engine, which can scale up to meet the organization’s requirements."