Q2 Results: Infosys’ Profit Meets Estimates, Margin Expands After Five Quarters

Infosys Ltd.’s quarterly profit met estimates and its margin expanded after five quarters as the rupee depreciated and visa costs fell.

Net profit rose 6.2 percent sequentially to Rs 4,037 crore in the quarter ended September, India’s second-largest software services exporter said in an exchange filing. That compares with the Rs 4,045-crore consensus estimate of analysts tracked by Bloomberg.

Infosys expects its revenue to grow 9-10 percent in the ongoing financial year against a forecast of 8.5-10 percent earlier. Revenue of the Bengaluru-based company rose 3.8 percent over the previous quarter to Rs 22,629 crore in the July-September period. Analysts had pegged the top line at Rs 22,608 crore.

• Operating profit, or EBIT, rose 9.9 percent to Rs 4,912 crore.
• Operating margin expanded 120 basis points to 21.7 percent.
• Operating margin seen at 21-23 percent for the financial year 2019-20.

“I have been saying in the past that Infosys has definitely turned the corner. They are executing very well. They have invested in their own people to build new capabilities and go for deals that are less price competitive and more value-add,” Trip Chowdhry, managing director (equity) at Global Equities Research. “That has reflected in the expanding margins. That is also reflecting in raising the guidance. This indicates that Infosys has a handle of the situation.”

Nilanjan Roy, chief financial officer at Infosys, said the operating margin expanded during the quarter driven by an improvement in operational parameters and cost efficiencies.

Watch | Infosys Management Addresses Media After Q2 Earnings

Infosys’ acquisition of a controlling stake in Stater—ABN Amro’s mortgage administration services unit—for 127.5 million euros boosted the company’s revenue. Brokerage Nomura, in a research note prior to earnings, had said lower visa costs, operational efficiencies and rupee depreciation are may aid margin by 90 basis points.

A weaker rupee benefits IT services providers as they bill majority of their U.S. and global clients in dollars. The Indian currency depreciated nearly 2.78 percent against the greenback in the July-September period.

The company, however, said it didn’t receive the full benefit of the 30-basis-point boost of rupee depreciation as the pound and the euro also depreciated against the U.S. dollar. “Overall, we had a 15-basis-point hit on cross-currency basis and a took a 10-basis-point hit on currency hedge,” CFO Roy said in a press conference after announcing the second-quarter results.

Macroeconomic factors such as Brexit and simmering trade disputes between the U.S. and China pose challenges for the Indian IT firms as clients may reduce spending. Research firm Gartner said it expects the risk of an economic downturn “high enough” to warrant preparation and planning.

“We see Europe region being a little bit softer in terms of manufacturing vertical due to the impact of Brexit,” Salil Parekh, chief executive officer of Infosys, said.

Chief Operating Officer Pravin Rao said there has been a slowdown in the retail segment, too, so far this year.

Shares of Infosys closed 4.1 percent higher ahead of the results announcement, compared with the Nifty Index’s 0.6 percent gain.

Other highlights

• Voluntary attrition rate under 18 percent.
• Large deal wins in terms of total contract value in first half has been 75 percent higher year-on-year. Won 13 large deals; deal wins have been broad-based.
• Digital portfolio accounts for 38 percent of overall revenue.
• Comfortable with the current tax rate at the moment; India tax rates are marginally below 25 percent on a standalone basis.