Nothing ambiguous about Infys performance

Written by Darlington Jose Hector | Updated: Jan 21 2013, 08:24am hrs
Ever since Infosys announced its Q3 results, analysts and trade pundits have been busy analysing why Infosys did so well. Many are of the opinion that this is just a blip and the trend may not last. What magic has Infosys done in a matter of weeks, many wondered. Over analysing simple facts has become a way of life for some, as can be seen from the amount of deliberate confusion that has been created. The straight forward truth is that Infosys has shown substantial recovery in the October-December quarter and has managed to project a very healthy forecast. There is no ambiguity here. When sales click, scheduled agreements get signed and costs are managed, good results are achieved.

After a remarkably lean period, Infosys got its act together during the quarter winning fresh outsourcing deals that yielded $731 million. This augurs well for the $100 billion Indian IT industry as a whole. It grew the European market by 16% in revenues, when everyone thought Europe would continue to remain a weak spot.

Year 2012 was a big disappointment for everyone associated with the industry. Business volumes had dropped alarmingly, margins were under sever duress and employees on the bench piled up significantly during that time. Projections for 2013 were not rosy by any means, but going by what Infosys has dished out in Q3 there could be some light at the end of this long, dark tunnel.

For Infosys, its key acquisition last year has provided the extra cushioning. Revenues from Switzerland-based consulting firm, Lodestone, came in to prop up the numbers this time with sequential revenues in rupee terms growing by 5.7% to R10,424 crore. The sequential net profit of R2,369 crore has remained unaltered, despite the Street expecting lower numbers. It is clear the sales engine has been whipped into action. Costs have been kept under control and operational efficiencies have been improved upon. Infosys CFO Rajiv Bansal touched upon these aspects while explaining the reasons behind the improved showing. The companys sales force has not been in top form for a few quarters now, for largely unexplained reasons. Admittedly, some bit of this could be attributed to restructuring within the company and role changes. But now, most of that turbulence seems to have evaporated.

That confidence was evident when CEO Shibulal talked and postured with more assurance. We have done well, he declared soon after the results, something that he has stated for many quarters in succession. The deal pipeline is at its strongest in months. And 14 of its new wins came from its ambitious products and platforms space. Infosys has been trying to nurture its products division for some time, wanting to move from the tried and tested linear growth model. It seems to be succeeding in this endeavour, going by the numbers.

Most analysts had expected Infosys to lower its forecast from 5% to 3.3-3.8%, but the company did not do so. Analysts must surely have been disappointed with their predictions, but that need not translate to pessimism. In an analysts call in December, Infosys management had tread very cautiously when asked about the companys Q3 earnings. Analysts interpreted it as a mute outlook and wrote their reports suggesting a less than expected net profit. Infosys had underperformed for eight quarters on the trot and analysts did not think that a turn around was possible. That suited Infosys, as could be seen from the massive jump in share prices, once the earnings were declared.

Anyone who knows Infosys understands why the company goes about its business in a certain way. It is still a very conservative company and does not like to count its chicken before they hatch. Safety first. Analysts misread it as continuing weakness. It appears CEO Shibulal has been able to get his sales team on track. For many quarters, the spark was missing. Infosys was once renowned for its sales force, especially in its biggest market, the United States. Some bit of that spunk seems to have come back.

Despite some delayed decision making by clients, project ramp downs and hurricane Sandy, Infosys has been able to come up with some good wins.

Q3 typically is considered to be a weak quarter due to the number of holidays during the period, but Infosys chose to cross the sea when the tide was at its highest.