INFOSYS : Watch Those Numbers

Nilekani completes first full year as CEO of Infosys Marketing head Phaneesh Murthy resigns in a sexual harassment case, which the company settles for $3 mn BPO subsidiary Progeon takes off, with Akshaya Bhargava heading it

Group Revenues The Infosys Group The Money Came From
Narayana NR Murthy Chairman & chief mentor
Nandan Nilekani CEO, president & MD S Gopalakrishnan COO & deputy MD
Mohandas Pai CFO, & chairman, Progeon K Dinesh Head (HRD, IS, quality, productivity & communications design group) SD Shibulal Director & head (worldwide customer delivery) Srinath Batni Global accounts & Asia-Pacific Basab Pradhan Senior V-P and head (worldwide sales & retail (North America)
Progeon
Akshaya Bhargava MD & CEO, Progeon Ramesh Kamath CFO & chief risk officer, Progeon
1981	Narayan Murthy, Nilekani and five others leave Patni Computer to form their own company with Rs 10,000. Incorporated in Maharashtra. First-year revenues–Rs 12 lakh.
1991	Revenues a mere Rs 5 crore. Major makeover, including branding and IPO in 1993. Coincides with Manmohan Singh’s landmark budget and liberalization. Takeoff.
1995	Expansion phase begins–development centers across India and offices across the world.
1999	Nasdaq listing. Revenues cross $100 million. Two US centers.
2000	Era of corporate governa-nce. First to comply with US GAAP.
2001	Revenues $400 million. Tops many ‘Best Employer’ surveys.
2002	Revenues $500 million. Becomes the Agra of the south, with every visiting head of state dropping by at the by-now famous campus.
2003	Nandan Nilekani takes over as CEO from Narayana Murthy. Starts BPO/ITeS subsidiary Progeon.

There are things that happen in our lives that we remember forever... the
stuff that grandfather stories are made of. Last year was probably one such for
Infosys Technologies chief executive officer Nandan Nilekani. "When I was
47," he is likely to tell his grandchildren, "I took over as CEO of
the company at one of the most challenging times in its history." A time
when the company slashed revenue growth projections from 37% to 18.5%, sending
tremors through the industry. It then revised those projections to 33%. And
finally beat even that estimate with a 39% growth rate.

But it was also a time when profit margins got squeezed like never before...
where no deal was too small and each had to be fought for. When Nilekani flew
from continent to continent trying to close deals he would never have bothered
about a couple of years ago. When, for the first time in many years, operating
profits actually grew at a much slower rate than revenues.

As Nilekani says in the annual report, for Infosys, it was "the best of
times and the worst of times".

The best of times...

In some ways, this year was in fact better for the group than FY ’02. At
39%, its topline grew faster than the year before and was by far the highest
growth among the Top 10 giants. Even among software exporters, its performance
was well above that of its closest competitors, Tata Consultancy Services, which
grew at just 15%, and Wipro Technologies, which grew at 28%.

The company’s BPO subsidiary, Progeon, which was announced in FY ’02,
finally went off the ground last year. It is exceedingly small by industry
standards–Rs 21 crore in revenues by the year-end and just over 500 people–but
it had already broken even by the fourth quarter.

Moreover, despite tight margins, the group’s cash situation is better now
than ever before. For one, Infosys continues to remain debt-free and by the end
of fiscal 2003, it was sitting on over Rs 1,600 crore of cash and equivalents–compared
to just over Rs 1,000 crore last year. Meanwhile, the company has also got
shareholder approval for issuing secondary American Depository Shares.

Also, in terms of the sheer number of people, Infosys is beginning to
resemble a minor army of sorts. It hired 5,509 people last year–a historical
high–growing from 10,738 to a whopping 15,356, and that’s after attrition.
By the time the first quarter results for the new fiscal came in, it had grown
to over 17,000.

But that’s only one side of the story.

The worst of times…

The other side was peculiarly and particularly difficult. Peculiar because
in one of the first cases of its kind against an Indian company, Infosys’
high-profile marketing head Phaneesh Murthy, as well as Infosys, were sued by an
American employee for sexual harassment and wrongful termination. Phaneesh
Murthy quit last year in July–a blow in itself, given his stature in the
market and the difficult times during which he left the company. Then, earlier
this year, as the case came up for hearing, Infosys settled the case with Reka
Maximovitch for $3 million–a huge sum even by American standards for a case of
this kind–and as a reult, got into a bitter war of words and press releases
with Phaneesh. That Phaneesh also led its BPO subsidiary Progeon meant a break
in operations there till new CEO Akshaya Bhargava could be brought in to replace
him.

But that was a blip. The greater troubles came from the market itself. Though
the topline showed a healthy enough growth rate, the bottomline was squeezed.
Profit after tax almost halved–from 33% in FY ’01 to 18.6% in FY ’03 (it
was 31% in FY ’02).

This happened because despite what looked like a brief stabilization of
billing rates in the third quarter, pressure remained relentless and margins
decreased throughout the year. Infosys began the year, for instance, with
margins of about 30% in the first quarter, which came down to 27.5% by the
fourth quarter.

This is crucial. Over the years, the company’s operating profits have grown
at the same or higher rate than revenue. In 1999-2000, operating profits and
revenues grew at 73%. In FY ’01, operating profits grew 120%–higher than the
revenue growth of 115.5%. In FY ’02, operating profit growth at 36%, was only
marginally lower than revenue growth of 37%.

This was the first year where the two growth rates diverged significantly–revenues
grew at 39%, while operating profit grew by only 22.6%. This is also the first
time since 1997-98 that operating margins at the group have fallen below 40%–to
35%.

New patterns

Several factors have contributed to this. Gross margins were largely
affected due to higher onsite revenues. This, in turn, happened because service
lines like package implementation–which are higher onsite plays–grew
significantly.

Operating margins, meanwhile, have been affected primarily due to higher
sales and marketing costs. In the last two years, selling and marketing expenses
have tripled–from Rs 92 crore in FY ’01 to Rs 270 crore in FY ’03. Over
the last year alone, S&M budgets doubled and accounted for a whopping 7.4%
of total revenues, compared to 5% the year before.

Why? Old customers continued to exert pressure to renegotiate deals. Besides,
the larger orders faded away. Though the group added four really large clients
(two $40 million and two $30 million companies), deal sizes continued to remain
small. More important, the number of its smaller million-dollar clients grew
from 83 to 115 in fiscal 2003. The problem with that is that a large number of
small clients require more effort and more sales dollars per deal.

If this whole things sounds like nitpicking on numbers–it was that kind of
year for Infosys, a year of watching those numbers. Next year projections–a
topline growth of 22% to 24% and a possible tripling of Progeon revenues to Rs
76-85 crore. Those are now the numbers to watch out for.

TEAM DQ