Infosys Beats Estimates In The Second Quarter, But Slashes Full Year Guidance
Infosys’ Q2 dollar revenue grows 3.4 percent, even as it slashes its full-year guidance.
Infosys Ltd.’s operational performance in the July to September quarter surpassed analyst estimates, but the stock fell as the company lowered its annual sales guidance for the second time this year.
Net profit rose 5.1 percent to Rs 3,610 crore, compared to Rs 3,436 crore in the previous quarter, according to its filing on the stock exchanges. The consensus of analyst estimates tracked by Bloomberg stood at Rs 3,528 crore.
Revenue grew 3.2 percent to Rs 17,310 crore on a quarter-on-quarter basis, beating Bloomberg’s consensus estimate of Rs 17,179 crore.
Revenue in U.S. dollar terms rose 3.4 percent to $2.58 billion, compared to $2.5 billion in the previous quarter.
Earnings before interest and tax improved 6.5 percent to Rs 4,309 crore, from Rs 4,047 crore in the April to June quarter. EBIT margin expanded to 24.9 percent from 24.1 percent. The margin improvement was driven by better operational efficiency, Chief Financial Officer Ranganath D Mavinakere said in the press release.
The company clocked operating margins of 24.5 percent in the first half of the fiscal year, and expects to maintain margins in the 24 to 25 percent range for the rest of the year, Mavinakere added in the media briefing.
Guidance Dampener
Infosys slashed its annual sales forecast for the second time in three months. Sales in constant currency terms is expected to grow 8 to 9 percent this financial year, compared to the 10.5 to 12 percent forecast given in July. Sales in dollar terms is projected to grow 7.5 to 8.5 percent, compared to 10.8 to 12.3 percent earlier.
“We have revised our guidance based on current situation in the industry,” Chief Executive Officer Vishal Sikka said. The industry is seeing structurally challenging times, Sikka added, even as he maintained the company’s target of achieving $20 billion revenue by 2020.
The guidance revision is neither aggressive nor conservative and the management is being realistic, Girish Pai, the head of research of institutional equities at Nirmal Bang told BloombergQuint. The revised constant currency revenue guidance of 8 to 9 percent is a tad lower than the 8.5 to 9.5 percent band that Pai had expected.
Nirmal Bang maintains a ‘sell’ rating on the stock and is likely to revise its Rs 980 per share target price downwards, Pai added.
Verticals: More Pros Than Cons
The Infosys management raised also concerns over curtailed discretionary spending by its clients in the U.S. The banking and financial services and retail verticals will be muted in the next few quarters, Chief Financial Officer Pravin Rao said.
But for the quarter, the financial services vertical posted a 3 percent sequential growth. The energy, utilities, communications and services segment grew 3.9 percent and the life sciences segment grew 4.2 percent. The two weak spots were the retail and consumer segment, which posted a 1 percent revenue decline, and the manufacturing sector, which registered 0.5 percent growth.
Structural Shift
Size of large deals is getting compressed due to automation. This is especially true in verticals like retail and banking, where automation is driving down employee count, Sikka said.
The CEO who championed a shift in Infosys' business model towards automation, ever since he took over two years ago, admitted that revenue growth from the automation segment is still marginal.
Internal Service Lines
Infosys faces its biggest challenge in transforming internal service lines like consulting and business process outsourcing. Both these segment require major transformation and that has been factored into the revised annual guidance, said Sikka.
The consulting segment faces ‘legacy issues’ with respect to operations, Sikka told analysts during a conference call. The business will also be impacted due to the loss of the Royal Bank of Scotland Group Plc contract. Nearly 25 percent of the 3,000 employees on the RBS account belonged to the consulting team, said Rajesh Krishnamurthy, the president in charge of the consulting and energy business at Infosys.
The BPO business is currently given low priority and that needs to change, said Sikka. Infosys aims to bring automation into the BPO business by leveraging artificial intelligence and analytics, said Ravi Kumar S, the president and chief delivery officer at Infosys.