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Wednesday, October 11, 2006

Infosys: Boggling Our Minds

By William Trent, CFA of Stock Market Beat

We were impressed a few months ago when we noted that outsourcing firm Cognizant (CTSH) had hired 12,000 new employees in a single year. (After attrition, the net increase in employees was just under 10,000.) So imagine how impressed we were to learn that Infosys (INFY) hired 10,795 people during the second quarter (July-September) of the current fiscal (FY 2006-07).

As competitive as the job market in India is, it is still hard to hold on to good employees. Infosys notes:
With attrition level increasing to 12.9 per cent in the last 12 months, the net addition was 7,741 by the end of September, as against 6,390 a year ago and 5,694 by the end of previous quarter (April-June) when the attrition levels were 10 per cent and 11.9 per cent respectively.

On an annualized basis, the quarter’s attrition rate was close to 20%. As the employee base grows, high attrition makes it more and more difficult to grow. In fact, before the report this morning consensus estimates called for revenue growth to slow to about 28% next year (the fiscal year ending March 2008.) Adding the 20% turnover to that equation means hiring nearly 50% more employees, assuming billing rates and utilization stay about the same. So far, there appears to be no end to the potential growth of these businesses, so we won’t attempt to guess when that will be. In fact, management said that the business environment today looks better than it did 12 months ago.

On the conference call, management also noted that margins were up 2.6%. This was due mostly to a stronger dollar against the rupee and to lower visa-related costs.

Today’s businesses want to do more on a smaller IT budget. Indian offshoring firms are one way of helping them do so, which is why the offshoring firms are growing so much faster than the overall technology sector.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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