Have you heard? Infosys (Nasdaq: INFY) is onedarnexpensive company. Still, first-quarter results and higher guidance show the leader in Indian IT outsourcing has an attractive story for investors in that its business model is inherently disruptive to many business processes.
Thomas Friedman described it succinctly in The World Is Flat, when he meets Jerry Rao in Bangalore. Jerry introduces himself and mentions to Thomas that he does tax returns. Thomas demurs, mentioning that he has an accountant in Chicago. Jerry then explains that several medium-sized U.S. CPA firms have outsourced U.S. tax returns for him to do for them. Jerry is now the accountant's accountant. Small world, eh? Let's keep that in mind as we look over Infosys' latest results.
I can't argue with the earnings. The outstanding results not only sent shares higher by 6% or so but also lifted the entire Indian stock market just a day after several bombings rocked Mumbai. Revenues were up 39% to $660 million, and earnings per diluted share up 44% to $0.62 a share. Net profit margins were about 26.3%, up 70 basis points year over year. And this is what always amazes me when I look over Indian outsourcing firms: The company hired nearly 5,700 people in the last quarter, bringing their total employee count to about 58,400. Keep in mind, it had only 10,700 employees in 2002. Then again, this is a business that took 23 years to hit $1 billion in annual revenues, and only 23 months to hit $2 billion. Not your average company now, is it?
All of the good news aside, there are some negatives to Infosys' story, as well as other Indian outsourcers such as Wipro (NYSE: WIT), Satyam (NYSE: SAY), and Cognizant (Nasdaq: CTSH). It is getting more expensive to hire and retain employees, for one. Infosys mentioned in its conference call that it is increasing wages for Indian workers by 14%-15% this year, and pre-announced 11%-12% increases for next year to be more enticing as an employer of choice to forthcoming IT graduates.
Competition is also a worry, with IBM (NYSE: IBM) recently announcing it will invest $6 billion in India in the next three years. Invest in what, I am puzzled; and so is Infosys. In the conference call, management said it sees the investment as a validation of its business model, but also mentioned that is it not going to be an easy road for IBM. For one thing, Infosys' Corporate University handles 1.5 million applications a year and identifies and trains 25,000 students. To me as well, it doesn't add up -- surely IBM doesn't expect to be able to replicate in such a short time what Infosys and others have worked years to build? One thing is clear, though -- IBM's massive hiring of staff will only increase the severity of the hiring pressures for the Indian IT companies.
When you add it all up, Infosys' P/E of 41 and price-to-sales of nearly 10 indicates to me that the stock is priced to perfection. However, that doesn't make the story any less fascinating to watch, as the Indian IT industry reshapes the technology sector.
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Fool contributor Stephen Ellis does not own shares in any companies named above. You can view his holdings here . The Motley Fool has non-outsourced disclosure policy .
