One More Reason to Buy Infosys Shares

23 06 2008

Some shareholders buy shares of companies for reasons other than dividend and capital appreciation. A few shareholders buy Raymond’s shares to get the discount coupons. There are legions of small shareholders who have a token holding in Reliance industries, just to get an invite to attend the AGM. The high-tea is usually the high-point of the RIL AGM. Gift hampers given at the ITC AGM makes the day for some. I have retained a few shares of Infosys to get their Annual reports.

 

The Infosys Annual Reports are extremely well produced documents. The thought and effort put into its preparation, makes the otherwise staid document, come to life. Many companies use glossy paper and nice photographs to cover up for their lack of information. Infosys annual reports have both content and style. No wonder, Infosys has received numerous awards for its Annual Reports.

 

Leafing through the pages of the latest Infosys annual report, I got answers to a few questions, which I have found hard to explain, particularly, to those outside of the IT industry. What is high-end and low-end in IT Services? Why is BPO considered low-brow ? Why is consulting so aspirational for IT Services companies ? Why is software products business superior to the services business ?

 

The revenue generated per employee in each of the different areas gives a good metric to judge what is high-end and what is low-end. Infosys and almost all of the SWITCH companies get  bulk of their revenues from software services like Application Development and Maintenance (ADM). They employ thousands of programmers for this service-line. Infosys generated Rs 150 billion revenue in FY’08 by employing about 73,000 software engineers/programmers. So, each engineer is generating Rs 2 million in revenues per year.

Software products business generated Rs 5.97 billion revenues from 2000 odd employees. The revenue productivity from each employee thus becomes nearly Rs 3 million per year.

Infosys BPO generated Rs 9.37 Bn revenues from 16,295 employees. Each BPO employee contributing just about Rs 575,000 per annum.

 

The consulting business for Infosys generated Rs 2.46 Bn revenues from just 265 employee. Revenue productivity from each employee is nearly Rs 9.3 Million.

 

In other words, if we consider the ADM business as the base, BPO is low-end and Consulting is the high-end. Revenue productivity per employee in BPO is just 30 % of what an ADM employee gives.  The productivity for an engineer engaged in software products business is 50 % higher than the software services business.Consulting is so aspirational because each consultant gives nearly five times productivity of a software engineer.

 

A small twist in the tale. All the product-lines except consulting  were profitable for Infosys. Infosys Consulting incurred a loss of Rs 510 Million. High productivity does not mean high profits, it seems !!

– G. Mohan.
 

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2 responses

23 06 2008
SEO Professionals

Nice post!very informative.. I like it!

27 06 2008
Venkat Subramaniam

Interesting analysis..
By keeping the Consulting business separate from the other businesses viz., ADM, Products and BPO, Infosys has been sincere in projecting the actual picture of its consulting revenue. There is no denying the fact that topline muscle for Infosys like other Indian IT companies comes from ADM, and ADM is the source of sustenance for the other business lines of Infosys.

Inspite of Infosys making losses in its consulting business, the fact that consulting is seen as a means to an end, the end being getting new clients for ADM business, the organisation may not be too worried.

Over a period of time, the consulting revenue may become sizable to sustian itself.

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