Infosys Moves Beyond Body Shopping

In a recent discussion of Accenture, I talked about the recovery in the IT services and consulting space, which was driven by small and medium-sized deals in application maintenance and development, infrastructure outsourcing, risk management, data analytics, cost cutting, and business process outsourcing (BPO). The recovery seems to continue, judging from recent results. On January 14, SAP announced that it beat its revenues and margins forecast for 2009, signaling a recovery in demand. In December, Oracle reported a strong second quarter and gave guidance that exceeded expectations. With positive announcements by SAP and Oracle, there is increasing confidence among IT services companies on the pickup in discretionary spending.

Better software sales and greater demand for software is a positive sign for the Indian IT service companies, which are involved in the integration and implementation of these software programs. Also, a recovery in the global financial services industry and modest growth in developing countries such as India and China should drive growth of IT services and consulting companies. The worst definitely seems to be behind us, and these companies expect demand for IT services to pick up in the coming quarters. Infosys and Tata Consultancy Services (TCS), two of the largest India-based IT services companies, declared their results recently, and we will take a detailed look at their performance today.

Infosys Technologies Limited (NASDAQ:INFY) announced results for its third quarter ended December 31, 2009, on January 12. Revenues were $1,232 million in Q310, up 6.8% Q-o-Q and 5.2% Y-o-Y. Volumes in Q310 increased by 6.1% Q-o-Q. Operating margin was 35.5% in Q310 compared to 34.6% in Q210. Net income was $334 million in Q310, up 5.4% Q-o-Q and 0.6% Y-o-Y. Earnings per American Depositary Share (ADS) were $0.59 in Q310, up 5.4% Q-o-Q and 1.7% Y-o-Y.

Revenue per employee in Q310 increased 1.1% on blended terms compared to Q210. Utilization (excluding trainees) was 76.2% in Q310 compared to 73.2% in Q210. Infosys’s top 10 clients, which contribute approximately 27.5% to revenue, grew 12.2% in Q310, almost double the growth rate of the company. Infosys added 32 new clients during the quarter. The number of million-dollar clients increased to 336 in Q310 from 330 in Q210. Growth during the quarter was led by the United States and the financial services sector. Pricing has stabilized. In Q310, pricing increased 1.1% compared to 0.4% growth in Q210. Net, the company added 4,429 employees in Q310. Attrition during the quarter was 11.7% and involuntary attrition 8.3%. The company has 119 Fortune 500 clients.

I have said repeatedly that the Indian services firms need to move towards non-body-shopping revenues. Infosys showed some progress in this front. During Q310, Infosys launched Flypp, an application platform that enables mobile service providers to improve the customer experience with a host of ready-to-use experiential applications across several devices. A major health insurance firm bought the iTransform product suite, which helps clients to comply with the U.S. federal government’s mandates efficiently and cost effectively. A major consumer packaged goods (CPG) firm bought the Procurement module of the Supply Chain Visibility product suite to cut sourcing cycle times and plug leaks in procurement spend through better monitoring, compliance, and governance mechanisms.

A major retailer selected Infosys as a partner in its Future Store Initiative to advance cutting-edge technologies and innovative shopping concepts. Infosys has been chosen for its ShoppingTrip360 solution, an innovative managed service that offers retailers and CPG companies insights into real-time shopper and shelf activity. A grocery retailer in the UK partnered with Infosys to develop a new multi-channel Web platform to bring about an integrated online experience.

A leading provider of security testing software solutions engaged Infosys to engineer leading-edge penetrative testing products. The company is building a patient appointment scheduling system for a provider of medical laboratory tests and services. The system will allow a patient to schedule an appointment at any of the company’s more than 1,000 patient service centers. Infosys is helping a leading provider of virtualization, networking and Software-as-a-Service (SaaS) technologies to design its architecture for master data management. Infosys is also working with a major communications company in wireless 4G development. A specialty retailer engaged Infosys to develop a SaaS solution.

On December, 24, Infosys was selected to implement an 3.87 billion rupee ($83 million) IT project for the state of Karnataka’s power distribution utilities. The project is part of a central government-funded program to use information technology to cap electricity losses in the country. There is significant opportunity for IT companies within India since many government projects are expected to be awarded in the coming years, and Infosys, with its strong brand name and an ambassador, former CEO Nandan Nilakani, inside the government, is the forefront to win a large number of these projects.

These results are clearly, a strong set of numbers from Infosys. The company is building on its capabilities and even in a downturn market, it was able to turn all its subsidiaries profitable. Consulting and China, which made losses in the last quarter, turned profitable this quarter. Infosys won a $200 million outsourcing deal, indicating that large deals are finally coming back on the table, and this is a positive sign for the industry as a whole.

For the full year, Infosys expects revenues to be in the range of $4.75 billion and $4.76 billion, which is growth of 1.8% to 2.0% Y-o-Y. Earnings per ADS is expected to be $2.26, growth of 0.4% Y-o-Y.

TCS (BSE:TCS.BO) reported its financial results for the quarter ended December 31, 2009, on January 15. Revenues in Q310 were $1.64 billion, up 10.3% Y-o-Y and 6.3% Q-o-Q. Operating margin expanded by 103 basis points in Q310 on a Q-o-Q basis to 27.30%. Net profit in Q310 was $384 million, up 38.9% Y-o-Y and 14.2% Q-o-Q. EPS in Q310 was $0.20.

Volume growth in Q310 was 6.57%. During the quarter the company won 10 large deals: two from retail, two from media, two from government, and one each from banking, financial services, and insurance (BFSI), travel, manufacturing, and life sciences and health care. In Q310 the company added 32 new clients, 7 of whom are in the $5 million revenue bracket. Though Infosys saw an increase in pricing, TCS’s pricing was flat in Q310.

During the quarter, net employee addition was 7,692. The utilization rate during Q310 improved to 81.1% (excluding trainees) and 77.2% (including trainees). The attrition rate in Q310 was 11.5%, with attrition in IT Services at 10.8% and BPO at 18.3%. As of December 31, 2009, the company had 23 clients with $50 million in revenues and 6 clients with $100 million in revenues. The top ten clients contributed 29.9% of total revenues and the top five 21.5%.

Similar to Infosys, growth for TCS was driven by the BFSI sector. The company also had robust growth in telecom, energy, utilities, and technology. The improving economic scenario helped the Enterprise Solution segment to record above-average growth. Every market in which TCS operates in saw growth, be it the United States, the UK, Continental Europe, Asia Pacific, India, or Latin America.

During Q310, TCS was awarded a $100 million, 5-year deal from a major manufacturing firm, signaling the return of large deals. A UK government entity has chosen TCS to be its strategic ICT partner and to drive its strategic transformational change program. The contract is valued at £150 million ($246.24 million) over its lifetime. Karnataka and  Madhya Pradesh have selected TCS as the implementation partner for their Accelerated Power Development and Reform Programmes (APDRP). A U.S.-based pharmaceutical company has awarded TCS a multi-million-dollar, multi-year deal for managed services in its regulatory IT and discovery area.

A leading specialty retailer has selected TCS as its strategic partner for its e-commerce transformation program in a multi-year full-service deal. The company has been selected by a large global publishing company to manage its end-to-end publishing operations. A global travel services company has awarded TCS a 7-year, multi-million- dollar ADM and managed services deal.

TCS doesn’t issue guidance.

From the Q310 results of Infosys and TCS, it is clear that the IT services industry is back on the growth path, aided by global corporations’ need to cut costs and integration requirements for the M&As that have taken place in the past year. The only hiccup seems to be the appreciating rupee, which is expected to appreciate further and dent sector’s margins. The stock prices of both Infosys and TCS have run up in the past six months and may not present any upside in the near term, but with $14 billion in contracts coming up for bidding in the next year or so, and the Indian government looking to assign billions of dollars of work over the next few years, the companies stand to gain significantly in the long run.