Infy beats Street, raises guidance

Written by fe Bureau | Mysore | Updated: Jan 11 2014, 09:41am hrs
The countrys second-largest IT services exporter, Infosys, on Friday raised its dollar revenue guidance for the current fiscal, projecting a 11.5-12% growth in annual revenue on the back of its third-quarter earnings that beat market estimates. The firms net profit for the quarter during October-December grew 6.7% year-on-year in dollar terms with operating margins moving up by 1.5% to 25%.

Infosys revised guidance for annual revenue comes in higher than the 9-10% range previously expected, bringing it closer to the software services industrys growth prediction of 12-14% for FY14. The quarterly performance also came amid a management churn at the company that has seen a series of top-level managerial exits in the past six months. Infosys shares gained 2.84% to close at R3,548.90 at the Bombay Stock Exchange on Friday.

In dollar terms, the companys profits grew 6.7% year-on-year to $463 million, against $434 million. The companys revenue grew 9.9% year-on-year to $2,100 million during in the quarter. Sequentially, the firms profit moved up 20.9% while revenues increased 1.7%.

In rupee terms, Infosys capped the December quarter, traditionally a weak one for IT firms, with a 21.4% increase in consolidated net profit at R2,875 crore, compared with R2,369 crore in the year ago period.

The companys consolidated revenues grew 25% to R13,026 crore, compared with R10,424 crore in the corresponding period a year ago. Sequentially, net profit grew 19.4% and revenue increased by 0.5%.

JP Morgan said Infosys reported a better-than-expected third-quarter earnings primarily due to margin expansion efforts while revenue performance was in line with estimates.

The company reports 1.7% quarter-on-quarter revenue growth versus our expectation of 1.5% quarter-on-quarter and meaningful margin expansion. We believe margin expansion/management is the highlight of the quarter, the brokerage said. Murthys cost optimisation measures are paying dividends. However, there are still a few soft patches in the quarter such as high quarterly annualised attrition, decline in employee hiring and sequential decline in onsite billed volumes.

Infosys executive chairman NR Narayana Murthy, who came out of retirement in June to steer the company, said cost optimisation initiatives are aimed at getting results in 6-18 months.

Sales force restructuring will bring value between 9-12 months while delivery effectiveness will take between 12-36 months. We believe we will become the best soon, Murthy said. Sales force headcount is being rationalised and the changes are usual fluctuations and based on performance analysis. In fact we are raising the headcount in Europe.

During the quarter, we saw early but promising results of our initiatives to increase efficiency in our operations, chief financial officer Rajiv Bansal said, adding that the company expected margins to stay at 25% in the medium to long term. We continue to remain focused on making investments necessary to secure and grow our future, Bansal said.

The companys biggest market of North America declined by 0.8% sequentially while Europe grew 5.5%, during the period. North America contributed 60% to overall revenue compared to 61.5% in the previous quarter. The India market grew 9.2% while all other regions grew by 4.9%, sequentially.

We had a decent quarter in terms of growth mostly driven by non-US geographies and the retail, consumer products and life sciences verticals, CEO and managing director SD Shibulal said, explaining that the decline in the US was a seasonal fluctuation.

The year ahead looks exciting for the IT services industry. We believe the global economic environment has improved and our clients are gaining confidence to invest in their strategic initiatives, Shibulal said.

Murthys focus since returning to the company in June has been on improving the cost structure and the December margin performance suggests some of those efforts are bearing fruit, helped in no small measure by a weaker currency, said a research note from CLSA. We believe there is further runway for Infosys on margins without compromising on growth. FY15 margins could settle around 25.5% in our view.

The attrition levels went up to 18.1% from 17.3% in the preceding quarter, with a negative net addition of 1,823 employees.

Infosys, whose recruitment during FY13 was its lowest in the past five years, has previously said that hiring will be based on business needs.

The utilisation rate, excluding trainees, was at 78% marginally higher than 77.8% a quarter ago. According to Bansal, every 1% improvement in utilisation will result in improvement of margin by 50-60 basis points. When growth is coming, it is better to have a utilisation level of 80%, so that you are comfortable to handle big deals that may come your way, he said. He said the company will take a call on a wage hike closer to March-April.