A man walks off an escalator inside Building 44 at the Infosys Ltd. campus in Electronics City in Bangalore. (Photographer: Sanjit Das/Bloomberg)

Q1 Results: Infosys Profit Misses Estimates In June Quarter

Infosys Ltd. missed analyst expectations in the April-June quarter as its margin contracted and the key banking and financial services vertical underperformed.

Net profit of India’s second-largest software services provider fell 2.1 percent quarter-on-quarter to Rs 3,610 crore during the April-June period, Infosys said in its exchange filing. That compares with the Bloomberg consensus estimate of Rs 3,741 crore. The bottom line was hit by a Rs 270 crore reduction in the fair value of Panaya.

  • Revenue rose 6 percent sequentially to Rs 19,130 crore.
  • Revenue in dollar terms grew 0.9 percent to $2,831 million.
  • Operating profit fell 2 percent to Rs 4,267 crore.
  • Operating margin contracted 100 basis points to 23.7 percent, within the 22-24 percent guidance that the firm had given earlier.
  • Sales growth forecast maintained at 6-8 percent for 2018-19

The company, after a boardroom coup and leadership change last year, is preparing for the opportunities ahead. For that, it will continue to invest in digital services ranging from big data analytics to artificial intelligence that deliver higher margins so that it can counter lower spending and a move to automation by its clients.

“With our agile digital business growing sequentially at 8 percent in constant currency and increase in our large deal wins to over $1 billion, we see good traction in the market,” Managing Director and Chief Executive Officer Salil Parekh said in the media statement.

That may not be enough to win over investors. “While Infosys has done well given what's been happening in the company, to put it simply, they have not been beating the street expectations, which as such aren’t very high,” said Urmil Shah, a research analyst at IDBI Capital. “Based on what TCS and Infosys have delivered this quarter, there is no clear sign of an uptick in the IT industry.”

Infosys’ banking and financial services vertical that accounts for just over a third of its total revenue saw a 0.2 percent sequential decline during the quarter. That's after its rival Tata Consultancy Services Ltd. reported a rebound in its banking business.

Yet, the management remains confident. “We see good traction starting to come in the banking and insurance space, and especially in insurance activity,” Parekh said in a media conference in Bengaluru. “The outlook of the financial services vertical remains positive and we see it as the foundation of driving the business.”

This conviction may be partly fuelled by the fact that over 40 percent of Infosys’ new deal wins came from the banking and financial services vertical. “This gives us confidence that the environment is solid, our client base is reflecting that and they see that we have the capabilities to drive that. Now we are starting to execute on it,” Parekh said. “That gives me postive feeling about how the sector will evolve.”

Infosys’ deal wins crossed the $1 billion mark after seven quarters.

“That’s a positive sign,” according to Harit Shah, an analyst at Reliance Securities. “It is encouraging. We saw the same thing with TCS as well,” Shah told BloombergQuint. “That is going to definitely improve the sentiment towards the stock and the overall business outlook for Infosys.”

Other key verticals including retail business and energy reported significant uptick.

Margin Breakup

Infosys' operating margin, a key indicator for an IT firm's performance, declined 100 basis points despite a depreciation in the rupee during the quarter. “Given the rupee depreciation during the quarter, the EBIT margin shouldn't have declined so much,” Urmil Shah said.

The benefit from a weaker rupee was offset by the compensation that it rolled out to its employees earlier in April, according to Chief Financial Officer MD Ranganath. “Then because of higher utilisation and on-site mix moderation we had a benefit of about 40 basis points. But again higher investments and additional expenses had a negative impact of 140 basis points. So, net is a 100 basis point decline.”

Capital Allocation

The software services provider’s free cash flow jumped 32 percent sequentially. And the company plans to return most of it to shareholders.

“The board has approved returning up to 70 percent of the free cash flow to them,” Ranganath said. “And additionally, over and above that, another $2 billion will be distributed to the shareholders of which $400 million we already returned through a buyback in June.”

He did not specify the manner and timing of the plan. The board also approved a bonus issue of 1:1 equity share and dividend of one American Depositary Share for every ADS held.

Attrition

Its attrition rate increased 50 basis points to 20 percent.

Some of the attrition is seasonal, but it is still higher than what the company has seen in the past, according to Chief Operating Officer UB Pravin Rao. The company has identified some specific interventions to bring attrition down, he said. Rao said on an average, the company recruits about 1,000 people every quarter and that trend will continue.

Other Highlights

  • Digital revenues now form 28.4 percent of Infosys' total turnover, growing 25.6 percent year on year.
  • Operating margin guidance retained at 22-24 percent.
  • Utilisation (excluding trainees) at all-time high of 85.7 percent.
  • Revenue growth in constant currency in North America stood at 2 percent, while that in Europe was at 2.1 percent.
  • Growth in India declined by 4.1 percent, while that in the rest of the world rose 5.3 percent.
  • Infosys added 70 new clients during the quarter of which 4 were in the $100 million plus band.
  • Net addition of employees was at 5,798.
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