Infosys Results & Guidance indicate tough road ahead

Infosys has declared the Q4 Results.

• Q4 FY09 net profit dipped 1.7% at Rs 1,613 crore as against Rs 1,641 crore on quarter-on-quarter basis.
• Revenue declined by 2.61% at Rs 5,635 crore as against Rs 5,786 crore QoQ.
• Consolidated net sales for FY09 at Rs 21,693 crore versus Rs 16,692 crore (a jump of 30%) and increase of 28.5% in Consolidated net profit at Rs 5,988 crore versus Rs 4,659 crore.
• Infosys has recommended a final dividend of Rs 13.5/share.
• Top client revenues for the quarter ended March 2009 declined by 12.06% QoQ
• Top 10 client revenues declined by 5.75% QoQ

These are highlights of Q4 Results. Now lets look at how the future appears to the Infosys management

• Q1 Revenue forecast at Rs. 5,379-5,480 crore.
• Q1 EPS seen at Rs. 23.55
• FY10 revenues to decline by 3.1-6.7% in dollar terms while increase in revenues by 1.7-5.7% in rupee terms
• EPS for full year FY10 at Rs 96.65-101.18 a share versus Rs 104.43 in FY09

What does Infosys result indicates?

Slowdown in Revenue Growth Evident

A drop in Revenues for the company which had made it a habit to surprise investors with superior financials is a clear indicator of things to come. Further the guidance for Q1 FY10 and Full year predicts a challenging environment both in terms of pricing as well as new business. Top 10 client revenues saw a sharp decline which means that there will be tremendous pressure on billing rates in the days to come.

Infosys results are a clear indicator of drastic cut by companies on their IT spend. Obviously, when things are in pretty bad shape due to ongoing recessionary trends, companies would tend to cut down on their IT investments to maintain their bottom lines. Similar and more downtrend would be visible in the revenues of other IT companies.

Cost Optimization would be crucial

In a scenario where a company is not able to grow its revenues, it becomes imperative to cut down on the operating costs to generate profits. This would be visible not only in the IT companies, but across the sectors as the pressure to preserve margin mounts. As a result, we would see major Headcount reductions being announced by companies more particularly in IT sector as headcount is a major cost factor.

Is Revenue segmentation a Indicator ?

If we see change in Revenue Segment by Industry, it gives at least an indication of the broad environment of that industry. The sharpest drop in Infosys Revenue came from Financial Services and Manufacturing Industry Clients. This indicates that these industry are facing serious challenges and hence cutting on their IT spend. The Revenues from Telecom sector has increased conforming that this industry has not been impacted in a major way by the ongoing slowdown.

As the results season starts, we would need to see how Indian companies performed in the Q4. There are no high expectation this time around and if a company reports QoQ growth that would be a good indication of companies performance. I personally feel that Infosys results and guidance are reasonably good considering the severe drop in consumption and negative sentiments globally. The companies stock at Rs. 1400 looks reasonably priced and don’t see much movement on either side due to the results.

Resources

Highlights of Infosys Q4 results

Infosys Investor Presentation Download

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Corp Buzz: Infosys to Buy UK based Axon group

 

    Business Standard and Economic times have reported that Infosys is all set to buy UK based Axon group for $753 Million. The deal is to be completed by November 2008. The UK based Axon Group is into consultancy services to multinational organizations that have chosen SAP as their strategic enterprise platform.

Axon Group has 2000 employees. The Q1 revenue for Axon was 204.5 mn pounds in 2007. The profit after tax for the same period was 20.2 mn pounds. According to sources in Infosys, transfer of ownership will be completed by November.

Kris Gopalkrishnan, CEO of Infosys said, “This strategic combination of our groups will accelerate the realization of our common aspiration - that of becoming the most respected provider of business transformational services in the global marketplace”.

The Axon Group Web site carry the following statement in its latest news section

On 25 August 2008, the boards of Axon and Infosys Technologies Limited ("Infosys") announced that agreement had been reached on the terms of a recommended cash offer to be made by Infosys for the entire issued and to be issued ordinary share capital of Axon (the "Offer"). The Offer, which is expected to be implemented by way of a scheme of arrangement, values Axon’s existing issued and to be issued (fully diluted) share capital at approximately £407 million (US$800 million) on a cum-dividend basis.

The Shares of Axon are currently trading at 502 pounds, up by 2% against yesterday's close.

About Axon Group

Axon is a business transformation consultancy that designs, implements and supports solutions that address complex business issues faced by large organizations who have selected SAP as their strategic enterprise platform. The company provides services in the field of Business Consultancy, Solution Implementation and Application Management.

The company has recently signed a joint venture with Pratt & Whitney to establish a world-class SAP services centre in Puerto Rico. Axon also executed few acquisitions recently. It's subsidiary Axon Solutions Inc. has acquired the business of EnterSys Group L.P., a leading provider of SAP consulting services to the oil, gas & chemical sector in North America. It has also acquired the business of SCM Solutions L.P. ('SCM'), a provider of specialist supply chain SAP consulting services in North America.

Axon's Financials

As per the latest Annual Report available for the year endind December31st,2007.

• Turnover* up 49% to £204.5m (2006: £137.5m):
  • US generated revenues of  £74m, 36% of the group, up from 23% in 2006
  • The proportion of revenues generated by our top 10 clients reduced to 67% (2006: 74%)

 

• Strong profit performance with adjusted operating profit** up 65% to £36.5m (2006: £22.1m)
  • Operating profit up 69% to £30.6m (2006: £18.1m)*
  • Profit before tax* up 67% to £29.5m (2006: £17.7m)
  • Adjusted profit before tax** up 63% to £35.5m (2006: £21.8m)

 

• Successful integration of acquisitions:
  • Two US acquisitions made in Q4 2006 were fully integrated in 2007 and now trade under the Axon name
  • The acquisition of JSPC, an SAP listed firm trading in Malaysia and China has now been fully integrated into Axon’s existing Malaysian off-shore centre

 

• Diluted earnings per share up 56% to 31.7p (2006: 20.3p)

 

• Proposed final dividend of 2.5p (2006 2.25p) making a total dividend per share for the year of 4.5p (2006: 4.0p)

 

Investment guru is of the view that the merger of Axon group with Infosys would help it tap the North America and UK markets where Axon was doing exceedingly well as well as strengthen its position in the Business Consultancy services. The deal at around 20 times the earnings of Axon is surely not an attractive deal as far as price is concerned but the long term benefits in terms of market share and access to Axon clients would be significant. Since it is a small ticket acquisition, the share price of Infosys would remain more or less range-bound.

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Market Chers Infosys results, Guidance

Infosys sends positive wibes, posts 57% YOY rise in Profits

The infosys results which were awaited very anxiously by the markets came out to be a morale booster for the markets. Though the results had not thrown any extraordinary surprise, the markets took comfort in the fact that there was no bad news either.

Infosys FY07 Revenues were up 45.91% to Rs 13,893 crore from Rs 9,521 crore. Net profit leaped 56.87% to Rs 3,856 crore from Rs 2,458 crore.

The company reported net profit of Rs 1,144 crore in the fourth quarter versus Rs 983 crore in the previous year, a growth of 16.38%. The net profit included Rs 124 crore of reversal of tax provision.Its revenues increased by 3.2% to Rs 3,772 crore from Rs 3,655 crore, QoQ.

The company has added 34 new clients in Q4 compared to 43 new clients in Q3 and 5992 employees versus 3282 employees in Q4.

As per Indian GAAP, Infosys has predicted an EPS of Rs 80.29 to Rs 81.58 for FY 2008, a growth of 20 - 22%, compared to an EPS of Rs 66.86 in FY 2007. The company had forecast 22.6 - 24.6% growth in revenue for FY 2008, between Rs 17038 crore and Rs 17308 crore. Infosys has considered the rupee-dollar conversion rate at 43.10.

The Board of Directors recommended a final dividend of Rs. 6.50 per share (130% on par value of Rs. 5 per share) for fiscal 2007

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