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Earnings forecast cause for concern

Krishnan Thiagarajan

INFOSYS Technologies has exceeded its own projections on the revenue front for the first quarter made during the earnings announcement for the year ended March 31, 2001 and the consensus analysts forecast in the run-up the results.

Compared to the total income projections of Rs 580-590 crores, the company has achieved a total income of Rs 626.01 crores for the first quarter ended June 30, 2001. Similarly, it has also exceeded the earnings per share guidance of Rs 27-28 made earlier , by notching up earnings per share of Rs 28.72 for the first quarter.

Although the financial performance has been encouraging, the earnings performance for Infosys does send out strong signals on the following:

I The company has reiterated that the economic environment in the US continues to remain challenging.

First of all, based on the challenging economic environment, it has stated that its second quarter total income will remain at the first quarter levels of Rs 625 crores or improve marginally to Rs 640 crores. In addition, the per share earnings will also remain locked in the first quarter levels of Rs 28-29 per share.

Besides, it has also indicated that in the absence of any material change in the external environment (particularly in the US), it proposes to maintain its revenue growth forecast for 2001-02 at 30 per cent (at Rs 2,500-2,560 crores) and per share earnin gs between Rs 118-121 per share.

I According the earnings announcement, Infosys has experienced pressures on its billing rates from both its existing and new customers, specially in new large-scale offshore initiatives for the first time. As a part of its revenue growth, while volumes g rew by 10.9 per cent, there was a price decline of 2.8 per cent as compared to the quarter ended March 31, 2001. This is clearly a cause for concern for the entire software industry, for both its frontline peers and second rung players in the industry.

I However, an improvement in the utilisation rates (including trainees) to 69.5 per cent in the first quarter from 64.5 per cent in the fourth quarter ended March 31, 2001 appears to have aided Infosys in pegging the erosion in operating profit margins. It recorded operating profit margins (OPM) of 39.27 per cent in the first quarter compared to OPMs of 41.13 per cent.

In addition, cost control in the form of a cut in foreign travel and other expenditure has also helped Infosys keep a close watch on its operating profit margins. In addition, the company has recruited only 116 employees this quarter, which will help kee p the staff costs under control in the next quarter.

I The ability of Infosys to garner half a dozen strong clients in the first quarter has enhanced the visibility associated with its revenues and that is expected to help its revenues in the second and subsequent quarters. In its effort to reduce risks, i t has been consistently bringing down its exposure to e-commerce engagements.

During the first quarter, e-commerce accounted for 23 per cent of total revenues compared to 25.8 per cent in the fourth quarter. Besides, start-ups and venture capital assisted accounted for 5 per cent of revenues compared to 7 per cent over the same pe riod.