The Hindu Business Line : Considerable challenges ahead for Infosys

Infosys Technologies has delivered on its guidance on the revenue front and has exceeded it on earnings per share for the June quarter. Be that as it may, the company has had its second successive quarter of revenue and net profits decline.

For the June quarter, revenues declined by 2.9 per cent sequentially to Rs 5,472 crore, while net profits declined by 5.3 per cent to Rs 1,527 crore. The fall in profit despite a 4.3 per cent decline in salaries and 3.3 per cent drop in selling and marketing expenses are due to a steep 28.5 per cent increase in provision for taxes.

The tax incidence is now close to 20 per cent compared with 15-17 percent levels, as the company is transitioning many facilities to Special Economic Zzone. In the intervening period, this level of taxes is expected to remain.

But the ‘lag’ effect of the economic slowdown is now beginning to reflect in Infosys’ numbers. An increase in the contribution of low-margin services, decline in volumes and utilisation levels, decline in the annual run-rate of large clients are key worries for Infosys. The key positives from the quarter are a sharp increase in the repeat business and a decrease in the accounts’ receivables days.

Infosys has seen a 1.6-percentage point sequential increase in the contribution of application development and maintenance services, which command lower billing compared to consulting and package implementation services. As discretionary spends decline, such services are likely to be the more outsourced ones. That the company won a deal with Telstra for $355 million, which involves delivery of such services over five years reiterates this point and may strain margins.

The vertical-mix and geographic-mix have not changed significantly during the quarter. The onsite-offshore mix remains unaltered as well.

The person-months billed has seen a 1.1 per cent sequential decline. Utilisation has fallen to 70.9 per cent, a 3.5 percentage points decline sequentially. Its top-client now contributes only 4.5 per cent of revenues, with a 300 million plus run-rate client now going below that level.

These facts point to the fact that volumes may remain under pressure for the next few quarters.

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