Infosys' Q1 Results: Gains From Rupee's Strength

Infosys Technologies Limited has begun the season of earnings results and the market is viewing its results as an indicator of the trend for the outsourcing industry. The following are the highlights of its Q1 results.

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Even though revenues grew by 40%, gross profit just grew by 32% because of the strong rupee during the quarter and the annual hike in wages. The company, however, has done a good job keeping down its operating expenses, which just increased by 28%.

Other Income: But the biggest outlier, I feel, is the contribution of other income. It was a whopping 23% of the net income ($62 mn out of the net income of $263 mn).

Looking at this year's 20-F report, one can get some details on other income. Other income/(expense), net includes interest income, income from liquid mutual fund investments, foreign currency exchange gains/losses including marked to market gain/losses on foreign exchange forward and option contracts, and provisions for losses on investments.

The investment income in fiscal 2006 (ending Mar-31-2006) was $48 mn and in fiscal 2007 (ending Mar-31-2007) was $71 mn. In 2006, the foreign exchange loss was $18 mn and in 2007 the foreign exchange gain was $8mn.

The following are the details of their income and net income for last three years:

Fiscal 2005 - $24 mn / $419 mn = 5.73%
Fiscal 2006 - $31 mn / $555 mn = 5.59%
Fiscal 2007 - $83 mn / $859 mn = 9.66%

Looking at the above trend, one can see that as the rupee becomes stronger against the dollar, other income is mostly derived from investments and foreign exchange increases. This quarter it has become very significant, contributing 23% of the net income.

Infosys is not in the business of investments, so this gain will not be looked upon as a gain contributed by mainstream business. But we all know that in the long term, the rupee is going to become stronger and stronger.

INFY 1-yr chart:

Comments

[ThomasVictor]

Hi Dayanand,
Interesting article - another great quarter from Infosys I think but there is the Rising Rupee factor etc. and as you mention now the 'other income' issue.

We'd discussed previously the difficulties of an Indian IT company being able to break into the the top levels of Management Consulting in the US & Europe and being able to compete with McKinsey, Deloitte, Accenture IBM etc.

But now we're hearing talk of acquiistion/merger with CapGemini or SmartStream Technologies.

Infosys plus Capgemini will be a full blown challenge to Accenture and IBM, VERY EXCITING, if the CapGemini and Infy people can work together productively and amicably.

SmartStream seems to be a Banking specialty - would enable INFY to dominate even in the Finance sector and maybe push more sales of it's banking software product Finacle.

This is beginning to sound like the Mittal Steel plus Arcelor and the Corus plus Tata Steel stories! I think Infosys has to take the plunge otherwise the 30 percent plus yearly growth rate will be difficult to maintain.

Any thoughts on the above?

Also what happened to the CEO who came after Narayanamurthy, Nandan M. Nilekani? I'm a bit surprised he has ben replaced as CEO/MD so soon. Any problems I wonder? Remember Phaneesh the US executive, he had to quit following sexual harassment charges.

Thomas

[ThomasVictor]

Sorry! Infosys hes declared no truth to rumors specifically re. CapGemini and (inference) SmartStream.

in.biz.yahoo.com/07071...

Nasdaq-listed Infosys was looking for acquisitions in non-English speaking markets like Germany, France and Japan to accelerate market penetration and get access to new technology services, he said.

[Dayanand]

Hi Thomas,
I am glad you liked my article......about aquisitions we are just seeing the one part of story.....the other part can be that a US based company like IBM or HP can aquire Infosys or Satyam and gain the core competance of outsourcing that INFY posseses.

I compare outsourcing and mainstream consulting with icecream and a flull fledged restaurant business. Following is a scenario I would like to describe.

Let us say in your town you have a restaurant that offers people good food and offers ice creams as dessert. A new joint opens up across the street that just sells a large variety of icecreams at about one fifth of price. So people start having food in the restaurant and walk to the icecream joint and enjoy the ice cream at one third of price.

Based on the above story either the restaurant can takeover the ice cream shop or the ic cream shop can takeover the restaurant. The deciding factor for investors would be whose business model would be easier to understand.

Coming back to our discussion , I guess Accenture and IBM have proved their point by ramping up their outsourcing business and generating large outsourcing revenues last few years. Companies like Infosys have yet to prove their point by ramping up their consulting practice.....

As of today people know that it is easir for a consulting company to adopt an outsourcing model than an outsourcing company adopting a consulting model.

Dayanand.

[sacsharma]

Infosys has been an underperformer in Indian Markets and continues to be so. The rupee impact is there to be seen. Already rupee projections are pegged from 36-39 in one year. One should have checked INFY CFO's statement on rupee-he was so unsure of the rupee movement!
Check INFY's comparison with another small IT stock called APTECH. Looks like glory days of INFY are behind us.
sagecapital.wordpress..../

[Nidhi]

Interesting that the foreign investments made by INFY is returning higher returns now since rupee is strengthening. Though we are usually aware of the other side where declining dollar would be hurting INFY revenue. Depending on the size of these two effects, the net effect of strengthening rupee can be deduced then .. just thinking out loud ..

[sacsharma]

Rupee is hitting 9 year highs against the dollar.
sagecapital.wordpress..../