INFY: Employee Growth Getting Tougher

By William Trent, CFA of Stock Market Beat

Infosys Technologies (INFY) Announced Results for the Quarter and Year Ended March 31, 2007, and what struck us was not sales or earnings, but employees:

• Gross addition of 5,992 employees (net 2,809) for the quarter by Infosys and its subsidiaries
• 72,241 employees as on March 31, 2007 for Infosys and its subsidiaries

In our earnings preview we said “They will make the numbers, but investors will listen closely to the update on visas and employee retention.” Doing the math, 3,182 employees left the company (the difference between net and gross.) That number is 5.2% of the number of employees at the beginning of the quarter, which we figure to be an annualized attrition rate along the lines of 20%, in line with the rates that have concerned us for some time. However, instead of the more than 10,000 new hires in the July-September quarter last year (which admittedly may have been boosted by graduation timing) there were less than 6,000 this quarter. As a result, the total number of employees grew just 4% sequentially – perhaps a 16% annualized rate.

While still impressive, it is important to remember that IT outsourcing is a labor-intensive industry. Revenue growth is very much reliant on adding employees and making them more productive. While revenues can grow faster than employees in the short term due to improved productivity, in the long term the relationship will be fairly tight.

Infosys grew earnings per share by 64% last year and is forecasting 27% growth this year. If the current run rate of employee growth is any indication, investors should expect a significant slowdown next year as well.

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