Q3 Results: Infosys Raises Revenue Forecast On Strong Deal Momentum

Infosys Ltd. raised its revenue growth projection aided by strong deal wins even as India’s second largest IT firm’s profit and margin missed analyst expectations.

Net profit fell 12.2 percent sequentially to Rs 3,610 crore in the October-December period, the company said in its exchange filing. That compares with Rs 4,136-crore consensus estimate of analysts surveyed by Bloomberg.

• Revenue rose 3.8 percent quarter-on-quarter to Rs 21,400 crore.
• Revenue in dollar terms rose 2.3 percent to $2,987 million, in line with estimates.
• Operating profit fell 10.5 percent to Rs 4,379 crore.
• Operating margin fell 110 basis points to 22.6 percent.

Despite missing forecasts, analysts remained confident on the software services outsourcer as it now expects constant-currency revenue growth at 8.5-9 percent compared with 6-8 percent earlier. “The increase is a very good sign and signifies strong acceleration,” Harit Shah, an analyst at Reliance Securities, said. “They’ve also maintained their margin band and that shows business is in pretty good hands at the moment.”

The results come at time when Infosys has started showing signs of a turnaround since its new Chief Executive Officer Salil Parekh took over a year ago. Large deal wins have returned at the Bengaluru-based firm, suggesting that clients are confident again. In the last three quarters, Infosys secured deals worth over $1.5 billion each.

“If you see the large deal wins for Infosys, earlier it used to be in the range of $700 million. But in last three quarters they've done $1.5 billion, $2 billion and now $1.5 billion again,” said Amit Chandra, an analyst at HDFC Securities. “This shows growth for Infosys is about to accelerate.”

Parekh, in a post-earnings press conference, said the confidence to raise revenue forecast comes from the fact that individual segments are growing well. “Also, our core services is growing. And that's where we make a difference in the market,” he said. “We have an extremely competitive offer and we are putting a lot of artificial intelligence into it. That’s attractive for our clients.”

Share of digital services like cloud computing, automation and analytics has been increasing in the company’s revenue share and growth returned to legacy businesses like financial services. Digital services now contribute 31.5 percent to its revenue.

Why Margin Fell

Margin for Infosys fell to its lowest in at least 10 quarters in the three months to December. That was partly because it accounted for depreciation at its controversy-stricken subsidiaries Skava and Panaya. Yet, the margin remained within the guided range of 22-24 percent.

Interim Chief Financial Officer Jayesh Sanghrajka explained why margin narrowed:

• Reclassifying Skava and Panaya from assets “held for sale” impacted margin by 40 basis points.
• New acquisition impacted margin by 20 basis points.
• Utilisation for Infosys dipped and on-site hiring mix rose, resulting in an 80-basis-point impact.
• Planned compensation changes had a 30-basis-points impact.
• Continued investments hit margin by another 30 basis points.
• All this was offset by the currency benefits of 50 basis points and lower leave and other costs of 40 basis points.

Headwinds Ahead?

Gartner predicts IT client spending growth will slow to 3.2 percent in 2019 from 4.8 percent in 2018. And then there are macroeconomic challenges. “Rising interest rates, the absence of a major tax break in the U.S. after the 2017 overhaul and slowing growth in Asia will likely curtail 2019 information technology spending growth,” Bloomberg Intelligence said in a prior report. “Brexit may also dent expansion, as companies look to cut costs.”

The results at the top-two Indian IT firms show that the fears may have been overstated. “The message from TCS and Infosys is that demand seems to be better than feared in a seasonally weak quarter,” said Moshe Khatri of Wedbush Securities. “Obviously, you have some optics related to margins. But net-net the results so far have definitely been better than expected.”

Parekh, like his counterpart Rajesh Gopinathan of TCS, said he is unsure of what the impact of headwinds ahead will be. “Our guidance is for 2018-19. I have no real view of the year beyond that,” he said. “At least, the pipeline for the year is looking strong. There are macro-environmental situations and we are watching them carefully. For now, we see no impact.”

Other Highlights

• Infosys announced a Rs 10,000-crore buyback and special dividend.
• It added 101 clients during the quarter—one in the $50-million-plus band, nine in the $20-million-plus category and 18 at more than $1 million.
• Attrition rate fell to 17.8 percent from 19.9 percent earlier.
• Infosys net-added 7,762 employees during the quarter.
• It also confirmed the reappointment of Kiran Mazumdar-Shaw as the lead independent director.