In a seasonally strong quarter, the country’s second-largest information technology (IT) services player, Infosys, demonstrated an improved performance. It met Street expectations on most counts, backed by large deal wins and broad-based growth in key verticals such as banking, financial services and insurance (BFSI), and retail.
However, the Bengaluru-headquartered firm continued to show restraints by not revising its revenue and margin outlook upward.
The company’s revenues and net profit came slightly ahead of analysts’ expectations. A consensus estimate of 23 analysts surveyed by Bloomberg had pegged the net profit at Rs 40.48 billion ($548.39 million) on revenues of Rs 203.18 billion ($2.75 billion).
In another development, the firm said it would pay its former chief financial officer Rajiv Bansal the pending severance package amount of over Rs 120 million as directed by the arbitration tribunal in September. Bansal had quit the firm in October 2015. “The company has received legal advice and will comply with the award and make the necessary payments,” the company said in an exchange filing.
In the second quarter ended September 30, 2018, Infosys’ revenue and net profit were ahead of analysts’ expectation. The company reported Rs 41.1 billion in net profit, growth of 10.3 per cent, compared to the year-ago period. Net profit grew 13.78 per cent sequentially.
Revenue for the period, at Rs 206.09 billion, showed a healthy growth rate of 17.3 per cent on a year-on-year (y-o-y) basis. In constant currency terms, Infosys reported 8.1 per cent revenue growth on y-o-y basis, while it grew 4.2 per cent sequentially. Its dollar revenue was at $29.21 billion, a growth rate of 7.1 per cent on y-o-y basis and 3.2 per cent sequentially.
A consensus estimate by Bloomberg had projected the net profit at Rs 40.48 billion on revenues of Rs 203.18 billion.
However, the healthy top line growth shown by the company in Q2 did not aid its margins much which remained flat sequentially, despite gains from the rupee’s depreciation. Analysts were disappointed with the margin figures, as most brokerages were expecting a gain of over 100 bps from the rupee reflecting on the operating margin. Infosys also maintained its revenue and operating margin guidance for the financial year, despite exuding confidence about demand uptick in the coming quarters.
However, the company fell short of its rival Tata Consultancy Services, which reported double-digit revenue growth in dollar and constant currency terms. The Tata Group company reported a third consecutive quarters of double-digit growth, with revenues growing 10 per cent to $5.215 billion y-o-y in dollar terms in Q2, while in constant currency terms it rose by 11.5 per cent.
During the September quarter, Infosys reported a 5.8 per cent rise sequentially in the financial services vertical, while revenue from the retail vertical grew 5.9 per cent. Other verticals that showed good growth numbers were manufacturing and high tech, which grew 4.8 per cent and 3.6 per cent, respectively, during this period.
“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,” said Salil Parekh, chief executive officer at Infosys. “These deal wins will (positively) impact revenue over the next several quarters,” he added.
In Q2 of FY19, digital revenue constituted 31 per cent of the company’s revenue at $905 million with a y-o-y growth rate of 33.5 per cent. Compared to this, TCS reported 60 per cent growth in digital services and contributed 28 per cent to its revenue of $5.215 billion.
On the operating margin front, Infosys reported a flat margin profile at 23.7 per cent during the quarter, despite a depreciating rupee.
According to Chief Financial Officer M D Ranganath, the IT firm got a cross currency gain of 80 bps in the September quarter, along with 70 bps improvement on operational efficiency measures. However, this was nullified as the company invested around 100 bps in paying higher wages to senior employees, apart from its expenditure to check attrition. Another 50 bps was expended in higher subcontracting cost.
“The rupee is volatile and we said at the beginning of the year that we would make certain investments whether it was digital or localisation. We have that trajectory. It’s a gradual process and loaded towards the second half of the year,” Ranganath said.
While North America grew 3.8 per cent on sequential terms, it was 4 per cent for Europe. “We are seeing good momentum in US and Europe. Overall, demand environment looks good and our conversation with clients indicate that they have a positive view on spending,” Parekh said.
The IT services firm, however, continued to witness higher attrition levels in the second quarter. Its overall attrition stood at 22.2 per cent, which is an improvement of 80 bps over the previous quarter. “We are taking specific interventions to check attrition. It will take another two-three quarters to show results,” said U B Pravin Rao, chief operating officer at Infosys.
The company added 11,887 employees on net basis during the last quarter taking its headcount to 217,739. Infosys announced an interim dividend of Rs 7 a share for shareholders.
Infosys’ share price ended up 0.97 per cent at Rs 692 a share at the end of the trading session on the National Stock Exchange on Tuesday, while the benchmark index rose 0.69 per cent to end at 10,584.75. The results were announced in Mumbai after the close of market hours.
Infosys’ improved performance was appreciated by its American Depository Receipt (ADR) holders with its ADR trading 5.7 per cent higher at $10.475 on the Nasdaq, at the time of going to press.