Meaningful Minutes

New technology, new innovation:

Read the Annual Report and you will find Infosys talk a lot about Automation and Design Thinking. Automation, especially, seems to be a big focus for the IT company as part of its efforts to improve efficiencies in this world of changing technology. In fact, Infosys managed to save efforts of 1,700 people in the March 2016 quarter partly led by automation platforms. Going forward, this is expected to help reduce costs for the company and improve profit margins.

Cost optimisation:

Infosys is also on a cost-optimisation spree to help improve profit margins. Some of these measures include traditional methods like improving the utilisation and reducing the number of employees who are ‘benched’. This is a departure from the usual IT company behaviour to hire more employees than required and ‘benching’ them. The idea is to ensure the company is always ready for more work. However, it leads to extra costs as the company has to pay these ‘benched employees’ monthly salaries. Infosys is challenging this notion and reducing its ‘bench’. Infosys is also considering other measures like having more low-level employees than senior managers and reducing the number of employees sent abroad for costlier, onsite projects.

Sub-contractor costs:

Infosys and other IT companies often face huge delays in their project for various reasons like getting a Visa. To bypass these problems, companies often recruit sub-contractors. However, they cost 40% more than Infosys’ own employees. This cost amounts to 5.7% of Infosys’ total revenues in FY16. This puts pressure on Infosys’ margins. “Hence, a 1% reduction in subcontracting costs can aid margins by 30 bps (0.3%). We believe there is scope for improvement on this front in FY17,” the Kotak Securities report noted.

Some margin pressures remain:

While Infosys optimises its cost to improve profits, there are some factors that can offset any gains. Three major factors are 1) rise in depreciation charges, 2) potentially higher variable compensation as against 75-80% in FY16 and 3) absence of rupee depreciation. “We see 50-60 bps (0.5-0.6%) risk to EBIT margin in FY2017 in the absence of rupee depreciation,” Kotak Securities said in its report. EBIT or Earnings Before Interest and Taxes represents the company’s profits from its core operations. EBIT margin, thus, helps measure the company’s operating profit margin – the percentage of revenue that the company pockets as operating profits.

One-time benefits:

Companies do not always receive payments from clients on time. These are called accounts receivables. Sometimes, though, companies classify some of these receivables as ‘doubtful’. They then set out a portion of their profit to cover these losses. These are called ‘provisions on doubtful receivables’. In FY16, Infosys managed to recover a lot of these doubtful receivables. This led to a negative provision, and thus, a 0.4% higher profit margin. This, however, is a one-time benefit that cannot be counted into future expectations.