Infosys headquarters in Bengaluru. (Source: BloombergQuint)

Infosys Profit Declines Amid Digital Push

Infosys Ltd. reported a sequential decline in profit due to a one-off tax gain in the previous quarter as India's second largest software services outsourcer looks to strengthen its digital offerings.

Profit in the quarter ended March fell nearly 28 percent over the previous three months to Rs 3,690 crore, according to its stock exchange notification. The profit is slightly lower than Rs 3,702 crore analysts tracked by Bloomberg were expecting.

The decline in profit was mainly because Infosys had got an income tax reversal of Rs 1,432 crore from an advance pricing agreement signed with the U.S. tax authorities in the quarter ended December.

Key Numbers

  • Revenue rose 1.6 percent sequentially to Rs 18,083 crore.
  • Revenue in dollar terms rose 1.8 percent to $2,805 million.
  • Operating margin expanded 40 basis points over the last quarter to 24.7 percent. Higher utilization and greater automation drove the better-than-expected performance.
  • Expects revenue in constant currency terms to grow between 6-8 percent in the financial year 2018-19.
  • Expects margin to remain between 22-24 percent in FY19. That’s a 100-basis point reduction from the earlier range of 23-25 percent.

The results are a sign that business for the information technology sector is now stablising, according to Trip Chowdhry of Global Equities Research. While it would take more time to achieve “secular growth”, for now the results are good, Chowdhry told BloombergQuint.

Infosys Profit Declines Amid Digital Push

Infosys is looking to shift focus back to business after being hit by a boardroom coup and a leadership change last year. It's bet for revival is its digital offerings that already contribute slightly over a quarter of the revenue. Its four-pronged strategy includes scaling up digital services, reskilling employees to match the new needs of the industry like artificial intelligence and deep machine learning, hiring more local workers in offshore centres in the U.S. and Europe while also holding its fort in their core business.

Our strategy is built on where our clients digital journey is taking them, and for us to have relevance for the future with our client.
Salil Parekh, CEO, Infosys

Digital services such as cloud transformation, that attempt to align and modernise IT infrastructure and standardise application processes, are becoming more and more an important component of the large deals that Infosys is getting. “Overall, the size of digital deals is definitely increasing,” said chief operating officer Pravin Rao. “The deals are also becoming more complex because now digital is moving beyond user experience and the front-end to modernising the back-end, analytics and the integration between the front-end and back-end.”

The push for digital is also why Infosys cut its operating margin forecast. “The primary reason is that we want to invest in digital, where we were under-invested,” said Chief Financial Officer MD Ranganathan. Anticipated investments in employee training, greater localisation in developed markets, and revitalising the sales force were the other factors, he added.

Margins are being sacrificed to secure future growth, said brokerage PhillipCapital in a note to clients. The margin levers cannot rest on employee utilization and expense management for much longer, wrote JPMorgan analysts. However, rival information technology firms including Accenture Plc. and Capgemini SE had also indicated similar margin pressures in their earnings announcements.

Other Highlights

  • Board identified up to $2 billion (Rs 13,000 crore) to be paid to shareholders this year. This includes a Rs 10 per share special dividend to be paid out in June.
  • Board recommended a final dividend of Rs 20.5 per share for FY18.
  • Infosys reported 10 large deal wins with total contract value of $905 million - the best quarterly performance in six quarters.
  • Board appointed Kiran Mazumdar-Shaw as the lead independent director.
  • Infosys will acquire WongDoody Holding Co., a U.S. based digital creative and consumer insights agency, for up to $75 million.
  • Attrition rate at 19.5 percent versus 18.7 percent sequentially.
  • Rolled out salary hikes ranging from “mid-single digit to high-single digit” for a majority of the employees.
  • Company created a special bonus pool of $10 million that will be paid to employees in addition to their variable pay.

Infosys stock rose 8.6 percent in January-March, compared with 3.9 percent decline in the benchmark Nifty. Infosys’ American depository receipts closed 7.7 percent lower on Friday.

Segmental Revenue

The energy and utilities vertical and the high-tech business registered strong growth in the January-March quarter, while manufacturing struggled.

  • Revenue from financial services rose 0.9 percent to Rs 4,683 crore
  • Revenue from energy and utilities rose 4.6 percent to Rs 4,437 crore
  • Revenue from retail, consumer packaged goods declined 0.2 percent to Rs 2,830 crore
  • Revenue from life sciences rose 2.2 percent to Rs 2,427 crore
  • Revenue from manufacturing rose 0.5 percent to Rs 1,965 crore
  • Revenue from hi-tech rose 3.7 percent to Rs 1,302 crore

Retail and manufacturing verticals will continue to register moderate demand, the company added.

The performance of Infosys’ North American operations remained largely unchanged in the March-ended quarter, while the revenue from Europe declined marginally after the strong showing in the previous three quarters. Growth was led mainly by other geographies.

  • Revenue from the U.S. grew 0.1 percent
  • Revenue from Europe fell 0.2 percent
  • Revenue from India fell 4.9 percent
  • Revenue from rest of the world jumped 6.3 percent

Panaya Put On The Block

The board decided to look for potential buyers for subsidiaries Kallidus and Skava (together called ‘Skava’) and Panaya, Infosys said in its filing. The transactions are expected to be completed by March next year.

Infosys' strategic direction comprises of digital and core information technology services and strong suite of products like Finacle, said Parekh.

Skava and Panaya did not fit all of the criteria we have today for scaling our businesses.
Salil Parekh, CEO, Infosys

The move to put the subsidiaries on the block was surprising, as the previous management team led by Vishal Sikka, was quite upbeat on its prospects, said brokerage PhillipCapital. JPMorgan analysts said the new strategy focussed on digital products is a better cultural fit for Infosys.

Infosys had acquired Skava and Panaya for $120 million and $200 million respectively in 2015. These assets amounting to Rs 2,060 crore (or $316 million) and liabilities of Rs 324 crore ($50 million) are now held for sale. The company has recognised an impairment loss of Rs 118 crore in respect of Panaya for the quarter. The corresponding write-down in the investment value of the subsidiary in the standalone financial statements of Infosys is Rs 589 crore, the filing said.

The asset sales may lead to more impairment losses over the next few quarters, according to B&K Securities.