Innovating the Route to Growth - Infosys Technologies
The appreciation of the rupee versus the US dollar, upswing in wages and likely recession in the US have not boded well for IT shares. The Sensex seesaw last month had investors across the country on tenterhooks. It seems that people with investments in outsourcing companies may be able to sleep better at night (no more damage to sea cables please!!!), after a recent industry report said that India’s outsourcing industry would experience a boom over the next four years. The study (Roadmap 2012 - capitalising on the expanding BPO landscape) was conducted by the National Association of Software and Service Companies (Nasscom), the premier trade body for India’s IT-BPO industry, and global strategy firm Everest Group. The report said that the country’s revenue from back-office outsourcing is likely to grow nearly fivefold to $50 billion by 2012, from the current $11 billion. Indian IT bellwether, Infosys Technologies Limited, is in a sound position to capitalize on this opportunity.
Reuters quoted CEO S. Gopalakrishnan as saying last week that the company is “cautiously optimistic” about the industry's growth, despite the concerns surrounding the US economy. Gopalakrishnan said at the World Economic Forum in Switzerland, “We are looking at stable prices with slight upward movement.”
Earlier this month, the Bangalore-based company reported its net profit after tax at Rs1,231 crore for the fiscal third quarter ended December 31, representing more than 25% YoY growth. Earnings per share was up 22% to Rs21.54. Infosys expects income in the quarter ending March 31 to range between Rs4,477 crore and Rs4,501 crore. For the fiscal year, India’s second largest IT company has projected its income at between Rs16,627 crore and Rs16,651 crore, representing almost 20% growth.
What could go wrong? The Indian outsourcing industry does feel the pressure of a declining US economy. However, Infosys did add 47 clients in the latest quarter, despite the US slowdown. Its bigger rival, Wipro did not do too badly on that front either. Then there is the issue of the shortage of skilled labour. A report from London-based HR firm ECA International earlier this week predicted a 14% jump in average wages at Indian multinationals this year. According to Nasscom President Som Mittal, India still has “a fairly large cost advantage,” despite wage inflation. “I think we are still ahead of the curve,” Mittal added. Forbes also quoted Gopalakrishnan as saying in an interview that India’s technology professionals are growing at around 25% per annum.
One of the overseas market’s ten best performing funds, Oppenheimer Funds Inc, has recently raised its holding of Infosys by more than 150%. That is quite something! Early last month, analyst Harmendra Gandhi of Lehman Brothers had upgraded the rating for Infosys from equal weight to overweight and had upped the 12-month price target from Rs1,793 to Rs2,132. In the note to clients, Gandhi had expressed optimism regarding the company’s revenue and earnings momentum over the next few quarters.
With significant cash in its pocket, we could surely see Infosys make some small acquisitions. Bigger ones are unlikely in the current uncertain environment. The company has delivered solid return on equity and seems in a strong position to continue doing so.
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