Infosys profit warning: A body blow to techies

INFOSYS had desisted from going public on its future prospects so far. It has broken the silence with a profit warning that has taken both investors and analysts by surprise even though its financial performance during the fourth quarter and the year ended March 2001, is on the expected lines. The profit warning has sent the stock in a tailspin to hit the 18 month low of Rs 3,238, down by 16 per cent.

It is better to focus on sequential growth figures to gauge the impact of the US slowdown fears. While Infosys’ revenue grew by 4.4 per cent to Rs 562 crore, the bottomline too went up by 9.2 per cent to Rs 182 crore. These figures alone might have allayed the fears somewhat but for the profit warning by the company itself. The company has cautioned that the growth rate could slip to as low as 30 per cent in the next fiscal.

Despite the warning, there is still hope for the company’s future. It is remarkable that Infosys could add 37 clients in the fourth quarter, the highest ever in a quarter. The company has been trying to improve its business mix and its segmental revenue. High-risk business coming from dotcom start-ups has slowly declined as a percentage of revenue to 4 per cent in the fourth quarter from 11 per cent in the first one. For the respective periods, the same thing can be said of the share of telecom start-ups in the revenue almost halved to 3 per cent from 6 per cent.

Moreover, geographical mix has improved too. The US and North America now contribute 72 per cent of the business down from 78 per cent in the previous year. European market has accounted for 21 per cent (15 per cent), showing signs of growth.

The company has continued to strengthen its human capital through new recruitment and that is a further reason for optimism. Even though the utilisation rate has been lower at 73 per cent from 78 per cent on q-o-q basis, the company is quite keen on hiring more people. This reinforces the belief that it is more focussed on tapping new growth opportunities. The conservative and transparent image of the company’s management gives hope that Infosys may have a few surprises in store for the first quarter results to June 2001 despite profit warning.

Satyam Computer
In the teeth of the reported slowdown of the US economy that has raised apprehensions over the growth prospects of the domestic software companies, Satyam has come out with a sterling performance. It has notched up earnings growth of 164 per cent to Rs 111 crore on sales of Rs 386.55 crore in the quarter to March 2001.

But the moot question remains: How long can this run be sustained by the company? A look at the sequential quarterly penetration rates into the markets of America and Europe suggest a lower penetration.

During the quarter, North America accounted for 75 per cent (74 per cent during Q3) of revenue, Europe contributed 7 per cent (7.12 per cent) Japan at 4 per cent (4.3 per cent) and the rest of the world at 14 per cent (14.8 per cent).

A wider technology portfolio and partnerships with enterprise technology vendors such as i2, Ariba, Siebel, Vignette, and SAP have helped the company to win new projects. Further, the reorganisation into strategic business units has helped the company to leverage client relationships better. As a result, business from existing clients has increased to 83 per cent of total revenues (63.27 per cent).

The top ten customers accounted for 49 per cent of revenues as against 56 per cent in the previous quarter as a result of better growth in business from other customers. During the quarter, 32 more clients were added. Offshore business accounted for 59 per cent (57 per cent) of the revenue.

The business mix underwent a distinct change. While Internet and E-commerce contributed 23 per cent to the revenue (30.7 per cent during Q3), the traditional maintenance business 23 per cent (18.5 per cent).

The ERP business also grew marginally contributing 8 per cent (6.8 per cent) to the total revenue.

However, the sterling performance has failed to enthuse the market as the Satyam scrip fell to Rs 198, close to lower circuit of 16 per cent. This follows the downtrend in the Indian techies listed on Nasdaq, including Sify, that have hit all-time lows.

Manish Joshi & Sachchidanand Shukla