>INFOSYS TECHNOLOGIES (JM FINANCIAL)

Annual report analysis

‘The past year has seen a decline in several things which we considered infallible.’ – The opening remark of Infosys’ FY09 annual report aptly brings out the degree of turmoil witnessed by the global economy last year. In its outlook for the current year, Infosys continues to be cautious, but believes that its strong business practices would help strengthen client relationships in the current scenario.
As the Infosys FY09 annual report highlights, the company has sustained performance in an extremely tough year. Manufacturing and Europe (excluding BT) have been the primary revenue drivers, while margins have improved in BFSI and Telecom despite significant drop in revenue growth. What is also noteworthy is that Infosys has invested in increasing its sales force in FY09 substantially, blasting fears of under-investment in the business.

The key highlights of the report are as follows:

■ Manufacturing gives a stellar performance in a tough year: Manufacturing (and Hi-tech) single-handedly contributed to 62.9% of incremental growth in FY09. Our channel checks indicate that a few large accounts in the US & Europe have ramped up significantly in this vertical.

■ Rupee helps cost control from impacting business investments: Infosys has smartly taken advantage of sharp rupee depreciation (+27.7% YoY) to pump up its business investments. We are heartened by the 200+ additions to sales force, the highest over the last 5 years.

■ Easing capacity utilization to keep capex low, sustain strong cash generation: Seat utilization remains low (1.1x vs. 1.2x over the last 4 years), which should help bring down capex costs over the next 1-2 years. We expect strong accretion to cash, despite a tough FY10E.

■ Lower hedges place Infosys at greater risk in case of rupee appreciation: Infosys had US$506mn in hedges as on 31 March 09, covering just 19% of its net foreign exchange exposure for FY10E. Sharp rupee appreciation (6.5% QTD) could expose the company to greater impact on revenue and margins. We are in no doubt that Infosys will emerge stronger out of this crisis, but
the signs of slowdown expected in FY10E are evident in several measures including capex reductions and headcount additions. We remain cautious on our outlook of recovery for the sector, and maintain our Hold rating on Infosys.

To see full report: INFOSYS TECHNOLOGIES