Saturday, July 28, 2007

The IndusView Publication - Vol 3, Issue 9

Infosys: Floating with the Tide

Under normal circumstances, the hedge against currency fluctuations by Infosys Technologies Ltd., would have worked just fine. The appreciation of the rupee versus the dollar in the past quarter, however, has been so significant that Infosys, India’s second largest information technology services exporter, had to lower its revenue and earnings guidance for 2007-08 in rupee terms even as it increased its guidance for both revenue and earnings per share (EPS) in dollar terms.

For the first quarter ended June 2007, the negative impact of rupee appreciation on its revenue has been estimated at 7.9%, and the company could post sequentially flat revenue only because the impact of rupee appreciation was offset by volume growth and improvement in billing rates. Improved utilisation and better pricing, however, couldn’t completely offset the dent in EBIDTA margin, which declined by 300 basis points (bps) to 28.7% in the quarter of April-June 2007.

Infosys had no option but to float with the tide as the Indian currency gained 6.8% against the dollar during the April-June 2007 quarter. Going forward, however, Infosys and Indian IT companies in general are not headed for any serious trouble as the demand outlook for these companies continue to be robust. Even in the first quarter of this fiscal, Infosys has added 35 new clients, and won three large deals worth more than $50 million each. By the end of the current fiscal, Infosys will be have about 100,000 employees as it plans to add 26,000 employees during 2007-08.

Outsourcing: Europe on the Move

The robust demand for the IT industry can be gauged from the fact that the total value of new outsourcing contracts in €40 million-plus bracket increased by 78% in the first half of 2007 compared with the same period last year, according to a report by outsourcing advisory firm TPI Inc. With this increased activity, Europe now accounts for more than half (54%) of new outsourcing contracts signed globally compared with 32% share registered in the previous year.

The new figures carry two important messages with regard to the Indian IT services companies. First, they naturally benefit from the trend among European companies to opt for more outsourcing. Second, increased Euro-earnings would de-risk the Indian IT companies from the volatility in the rupee-dollar exchange rate. While Indian companies have made serious attempts to penetrate the European market in the past, the U.S. market account for a majority of their earnings. With increased receptiveness in Europe, they clearly need to increase their European presence. Going forward, we can see increased merger and acquisition activities by Indian IT firms in the European market, aimed at obtaining geographical reach and customer access.

Europe is Top FDI in India

The European Union is one the largest trade and investment partners of India. The EU is India’s largest source of foreign direct investment (FDI) and accounted for 25.3% of total FDI inflows between August 1991 and December 2006. Similarly, the country’s exports to the EU stood at $23.8 billion in the eleven months from April 2006 to February 2007 and accounted for 21% of its total exports. India’s imports from the EU during the same period stood at $24 billion and accounted for 15% of its total imports, as highlighted by India’s Finance Minister P. Chidambaram at the India Europe Investment Forum in London in the last week of June 2007.

While these figures look encouraging at the first glance, the flip side of the same tells us that the despite all the excitement around the India story, the country ranks much lower in the list of EU’s preferred FDI destinations than one would have anticipated. India received only 0.3% of the EU’s worldwide investments and ranked 18th in the list of EU’s preferred FDI destinations. Clearly, that leaves a large scope for increasing the FDI inflow from Europe to India.

Bundeep Singh Rangar
Chairman, IndusView