Q2 Results: Infosys Scores $2-Billion Large Deals, Margins Flat Despite Rupee Boost

Infosys Ltd.’s profit rose as expected in the July-September quarter and India’s second-largest software services provider maintained full-year guidance, backed by strong client addition for the second straight quarter.

The Bengaluru-based firm’s net profit rose 13.6 percent sequentially to Rs 4,110 crore in the second quarter, according to its stock exchange filing. That compares with Rs 4,042-crore consensus estimate of analysts surveyed by Bloomberg.

• Revenue in dollar terms rose 3.2 percent quarter-on-quarter to $2,921 million.
• Operating profit rose 14.7 percent to Rs 4,894 crore.
• Operating margin remained largely flat at 23.7 percent.
• Infosys retained operating margin guidance at 22-24 percent.
• It maintained revenue guidance for 2018-19 in constant currency at 6-8 percent.

“Large deal wins at over $2 billion during the quarter demonstrate our increased client relevance and also give us better growth visibility for the near term,” Chief Executive Officer Salil Parekh said in a media release. Later, in an earnings press conference later, he said, “The large deal wins will have an impact on revenue for the next several quarters.”

Parekh took over about 10 months ago amid slower client spending in legacy verticals like banking and financial services and increasing competition. And he joined months after a boardroom coup by co-founders and exit of his predecessor Vishal Sikka. Strong fresh deal wins for the second quarter in a row suggest client confidence has returned. Moreover, share of digital services like cloud computing, automation and analytics also increased in the company’s revenue pie and growth returned to its key financial services segment.

The mainstay financial services and retail vertical were the fastest growing segments for Infosys during the quarter. “After a couple of soft quarters we have seen growth come back,” said UB Pravin Rao, chief operating officer, in a media conference. “Of the large deal wins we had, three were in financial services. We remain very positive about this space. The momentum is strong, the pipeline is healthy and we expect this to continue.”

The legacy verticals driving business will become key for Infosys going forward, said Mayuresh Joshi, fund manager at Angel Broking. “Financial services has had a good show for Infosys and that is where the core focus is going to be.”

Flat Margins Despite Rupee Boost

Unlike its rival Tata Consultancy Services Ltd., Infosys was unable to benefit from the depreciation of the rupee as Indian software outsourcers bill majority of their clients in dollars. The rupee declined 5.6 percent in the quarter.

Infosys’ margin remained flat sequentially at 23.7 percent in the quarter compared with an estimate of 24.4 percent. “It's clearly a big miss,” said Urmil Shah, Research Analyst, IDBI Capital. "We were expecting it to be 110 basis points higher.”

Some of the gain was offset by higher employee expenses. Infosys’ Chief Financial Officer MD Ranganathan broke this down: the cross-currency benefit was about 80 basis points, while another 70-basis-point benefit came from better pricing. However 100 basis points worth of margin gain was utilised for higher variable pay, planned increases of compensation of certain employees and some interventions to bring down attrition. The rest went towards higher sub-contracter expenses.

That wouldn’t deter Infosys from spending more to spur growth. “We are continuing our investments in agile, digital and artificial intelligence, and also in our people via training and compensation,” Parekh said.

Attrition

Infosys’ attrition rate fell marginally to 22.2 percent during the quarter. “Attrition has marginally come down. Nevertheless, it is higher than where we want it to be,” Rao said. “In some sense, it’s a reflection of high demand of talent in this space. Higher attrition is for people in the 3-4 years of experience range so we are working on some interventions.”

Other Highlights

• Infosys added a net of 73 new clients during the quarter: six in the $1 million-plus band, five in $10 million-plus band, two in the $50 million-plus band and one in the $100 million-plus band.
• Large deal wins likely to be lumpy over next few quarters, Parekh said.
• Digital revenue stood at $905 million. The management noted that digital services deliver higher gross margins than core business.
• Declared interim dividend of Rs 7 per share

Infosys closed 0.39 percent lower ahead of the results announcement today compared with a 0.85 percent rise in the S&P BSE Sensex. It gained 11.7 percent during the July-September quarter.