Feeling The Heat

Infosys may not be able to sustain its previous profit margins or levels of

profitability, a filing with the Securities and Exchange Commission (SEC) of the

US in connection with the forthcoming ADR issue has stated.

In fiscal 2004 and 2003, the company's net income was 25.4% and 25.9% of

total revenues as compared to 30.1% of total revenues in fiscal 2002. This

decrease reflects pricing pressures for its services, volatility of the rupee

against the dollar and increased wage pressures in India.

"In fiscal 2003, we began to incur substantially higher selling and

marketing expenses as we invested to increase brand awareness among target

clients and promote client loyalty and repeat business among existing clients.

We expect increased selling and marketing expenses in the future, which could

result in declining profitability. In addition, while our Global Delivery Model

allows us to manage costs efficiently, as the proportion of our services

delivered at client sites increases, we may not be able to keep our operating

costs as low in the future. This would also have an adverse impact on our profit

margins," the filing stated. It goes on to add that in case of an economic

slowdown, the company's utilization and billing rates for technology

professionals could be adversely affected, resulting in lower gross and

operating profits. Any inability to manage its growth could disrupt business and

reduce profitability too. Infosys has grown significantly in recent periods.

Between March 31, 2000 and September 30, 2004, its total employees grew from

5,400 to 32,900.

It may also be unable to recoup its investment costs to develop software

products. "In the six months that ended September 30, 2004 and fiscal 2004

and 2003, we earned 2.7%, 2.8% and 4.6% of our total revenue from the sale of

software products. The development of our software products requires significant

investments. The markets for our primary suite of software products that we call

Finacle are competitive. Our current software products or any new software

products that we develop may not be commercially successful and the costs of

developing such new software products may not be recouped."

With software products not expected to contribute much, Infosys bottomline

will continue to feel the heat in the near future.

Team DQ