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Infosys Q3 Profit Beats Analyst Estimates, Full Year Guidance Cut

Infosys cuts its guidance for the third time this year. 

Vishal Sikka, chief executive officer of Infosys (Photographer: Jason Alden/Bloomberg)
Vishal Sikka, chief executive officer of Infosys (Photographer: Jason Alden/Bloomberg)

Infosys Ltd.’s operational performance in the October to December quarter surpassed analyst estimates, but the stock fell after the company lowered its annual sales guidance for the third time this year.

Net profit rose 2.9 percent to Rs 3,710 crore, compared to Rs 3,606 crore in the previous quarter, according to its filing on the stock exchanges. The consensus of analyst estimates tracked by Bloomberg stood at Rs 3,561 crore.

Revenue remained flat at Rs 17,273 crore on a quarter-on-quarter basis, in-line with Bloomberg’s consensus estimate of Rs 17,294 crore.

Revenue in U.S. dollar terms declined 1.3 percent to $2.55 billion, compared to $2.58 billion in the previous quarter.

Earnings before interest and tax improved 0.6 percent to Rs 4,334 crore, from Rs 4,309 crore in the July to September quarter. EBIT margin expanded to 25.1 percent from 24.9 percent.

Another Guidance Cut

The company cut its revenue guidance in dollar terms to 7.2-7.6 percent as compared to 7.5-8.5 percent earlier. Similarly, the upper band for revenue guidance in constant currency terms has also been lowered from nine percent to 8.8 percent.

The company in October had guided for sales in constant currency terms to grow between 8 to 9 percent this financial year, compared to the 10.5 to 12 percent forecast given in July. Sales in dollar terms were projected to grow between 7.5 to 8.5 percent, compared to 10.8 to 12.3 percent earlier.

We give an annual guidance every year and review it periodically. This is a transparent process that we follow. The guidance is primarily based on setting an expectation as to what we see in the market at that time. This is a policy we have been following since the company listed in 1993. 
MD Ranganath, CFO, Infosys

Segmental Revenue

  • The company’s financial service revenue fell 0.5 percent to Rs 4,663 crore as compared to Rs 4,686 crore in the previous quarter.
  • Manufacturing revenue grew 2.2 percent to Rs 1,893 crore as compared to Rs 1,853 crore quarter-on-quarter.
  • Revenue from the Life Sciences and Healthcare segment rose 5.1 percent to Rs 2,196 crore as against Rs 2,089 crore last quarter.

Geographical Segment Growth

  • North America saw a decline of 0.6 percent both in terms of constant currency as well as sequentially.
  • European segment saw a decline of 2.5 percent sequentially while seeing a growth of 1 percent in constant currency terms.
  • India saw decline of 1 percent sequentially and 0.1 percent in constant currency terms.
  • Rest of the World declined by 3.2 percent sequentially and 1.5 percent in constant currency terms.

The management continues to lay emphasis on its automation business and innovation going ahead.

Beyond the quarterly numbers, we continue to focus sharply on the execution of our strategy, as reflected in the growing embrace of AI-based automation, growth in our new software-led business, delivering innovation, both incremental & breakthrough and fostering a learning-led culture. 
Vishal Sikka, CEO, Infosys

The company’s attrition declined 1.6 percent sequentially on a consolidated basis. The management attributed this to the company’s constant efforts towards employee engagement.

Our continued efforts to improve employee engagement and experience resulted in a reduction in attrition.  
UB Pravin Rao, COO, Infosys

The company has managed to add 77 clients this quarter while adding 2 new clients in the more than $75 million revenue category.

Utilization levels for the company stood at 81.9 percent which was the highest in the third quarter. This is the seventh successive quarter for the company with utilization levels of above 80 percent.

The Trump Impact

There has been a severe lack of clarity in terms of how U.S. President-elect Donald Trump’s policies are going to shape up. The management of Infosys however, remains optimistic and hopeful that the policies will be innovation and business friendly once the new administration takes over on January 20.

The indications that we have had over the past two months shows that the policies are likely to be innovation and business friendly. We have not seen any discernible change in client behaviour so far. We need to continue to focus on delivering innovation oriented delivery of value going forward. 
Vishal Sikka, MD And CEO, Infosys

Analyst Take

Analysts believe that the policies of Trump will not only impact Infosys but the overall information technology sector. Sanjeev Hota of Sharekhan sees the current form of the ‘Protect and Grow American Jobs Act’ as extremely negative and that the final shape of the bill will remain crucial.

Most of the companies that we have spoken to have begun to prepare themselves for this by hiring more locals and aligning their workforce in the global markets. 
Sanjeev Hota, I.T. Analyst, Sharekhan

Positive For Long Term

Based on the commentary from the managements of Infosys and TCS, Hota sees a relatively better Q4 from Infosys as compared to the previous year adding that H2 of any year is relatively weaker for I.T. companies as compared to H1.

Now that the management of Infosys has tightened the guidance to 8.4-8.8 percent, I see no reason why they cannot meet this in the fourth quarter unless there is a one-off event. 
Sanjeev Hota, I.T. Analyst, Sharekhan

Hota maintains his ‘Buy’ rating on the stock with a target price of Rs 1,150 for a 12-15 month horizon.

He believes that as the earnings for the entire sector is likely to be volatile, the investors should enter the stock only with a long-term view. The ‘Buy’ rating was also due to the risk-reward ratio turning favourable for the company.

Shares of Infosys pared early gains of as much as 4.5 percent in early trade and were trading lower by 1.8 percent at Rs 981.90.