Q1 Results: Infosys Hikes Revenue Forecast Even As Margin Contracts
Wage hikes, visa costs and rupee appreciation weighed on the software services outsourcer’s margin.
Infosys Ltd. raised its revenue forecast for the full year even as higher costs led to a contraction in margin and decline in profit in the quarter ended June.
The software services exporter expects revenue to grow 8.5-10 percent in 2019-20, according to its exchange filing. That’s higher than its 7.5-9.5-percent guidance in the previous quarter.
Higher revenue guidance comes at a time the company’s margin fell on account of wage hikes, visa costs and rupee appreciation. A strong set of deal wins over the previous quarters have not been enough to offset the higher costs for Indian information technology companies. Infosys had lowered its margin forecast for a second straight year in April as it continues to invest in digital services, increase salaries to retain talent and hire more employees overseas.
Chief Executive Salil Parekh said the traction across all sectors boosted the confidence to hike forecast. “Many of our sectors are growing in double digits like telecom and energy,” he said in a press conference. “We see demand for all our digital work where growth is 49 percent. That’s giving us some level of confidence to raise the guidance.”
Madhu Babu, IT analyst at Centrum Broking, however, said it may be just a standard practice for the company to report a conservative revenue estimate and then later raise it.
“They have mainly upped the lower end of the guidance. Because you have the remaining three quarters. This is typically how Accenture also does it,” Babu told BloombergQuint. “Initially, you give a very weak lower end. Then gradually you upgrade that.”
Infosys had been very conservative in the last quarter. That’s typical of them. They are always conservative with guidance and then raise it gradually. Only in between we had Vishal Sikka who was a bit aggressive with his guidance. But this is the usual Infosys-styled guidance.Madhu Babu, Analyst, Centrum Broking
Key Highlights
- Revenue in rupee terms rose 1.2 percent over the previous quarter to Rs 21,803 crore.
- Revenue in dollar terms rose 2.3 percent to $3,131 million.
- Operating profit fell 3.2 percent sequentially to Rs 4,471 crore.
- Operating margin narrowed 90 basis points to 20.5 percent.
A similar trend played out for its larger peer Tata Consultancy Services Ltd. as its profit remained flat and margin narrowed to its lowest in two years.
Infosys expects the margin situation to improve from here on. Parekh said the company, last year, had to launch an investment drive to “play catch-up with other IT firms in areas like sales and digital”. Those one-off investments are now done. “Our focus now is very clear approach on operational efficiency and a very disciplined way of managing of costs,” he said.
The company had guided its margin to be in the range of 21-23 percent for 2019-20. “We are now at 20.5 percent. When you look at that, of course the margins will have to go up and we are confident that they will,” said Chief Financial Officer Nilanjan Roy.
But Trip Chowdhry, managing director (equity research) at Global Equities Research, said the company should still stick to spending more to get bigger deals.
“It’s very important for Infosys to reinvest in their business. They should be focused on making sure they’re able to capture large deals,” he told BloombergQuint. “That means in the short term the focus on margin isn’t appropriate. It’s all about growing the top line.”
Change In Shareholder Payout Policy
Infosys also changed its dividend payout policy. The company will return about 85 percent of its free cash flow, cumulatively over a five-year period, to shareholders through dividends and buybacks. That’s effective from 2019-20. Earlier, it used to pay up to 70 percent.
Roy said the company wanted to have a progressive, growth-oriented dividend policy.
“This is a free cash flow business. Except for any mergers and acquisition, you really don’t need the cash,” Roy said. “Shareholders have been telling us loud and clear that you’d rather give the the cash back than putting in fixed deposits and earning 6 percent.”
The whole ethos has been that if the value creation in their hands is going to be more, then we should return the cash back.Nilanjan Roy, CFO, Infosys
That will also not constrict Infosys’ ability to acquire or make investments when an opportunity arises, Parekh said, adding the company can raise any amount of debt if they want to buy something. “We feel returning the cash to shareholders is the right way to run this business.”
Besides, Infosys will continue with its existing buyback even after the government announced a tax on buybacks in the Union budget.
Other Highlights:
- Constant currency revenue growth at 2.8 percent sequentially.
- Attrition rate stood at 23.4 percent against 20.4 percent in the previous quarter.
- Infosys added 112 clients during the quarter.
- Of this, two were in the above 100-million-dollar band.
Shares of Infosys closed 0.7 percent higher ahead of the earnings announcement compared with a 0.26 percent fall in the Nifty 50 Index.
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