Strong margins, pumped up volumes help Infosys turn in good Q1 numbers

Written by fe Bureau | Bangalore | Updated: Jul 12 2014, 07:04am hrs
InfosysInfosys MD & CEO SD Shibulal (left) with CFO Rajiv Bansal at the company?s headquarters in Bangalore on Friday.
IT major Infosys on Friday recorded a mere 1% sequential decline in net profit for the June quarter in dollar terms surprising the Street which had projected a steeper fall in profitability riding on the back of higher volumes and employee utilisation rates. Infosys, which registered a net profit of $482 million during the period, was able to sustain profit margins while delivering a 2% sequential revenue growth.

Volumes grew 2.9% for Indias second largest IT services company, which said that an increase in onsite volume, coming after nearly two quarters, pointed to more projects starting onsite. Infosys left its dollar revenue guidance for the fiscal unchanged at 7-9% with the management indicating that demand and pricing would remain stable in the medium term. Infosys shares gained 1% to close at R3325.80 apiece on the BSE on Friday.

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Operating profit margin, lower by 40 basis points at 25.1%, came in as a positive surprise against analysts expectations of a drop of 200-250 basis points from wage hikes and higher visa costs.

The IT major attributed this to utilisation level climbing to 80.1% from 76.7% in January-March, and cost optimisation measures kicking in.

The margin would have been closer to the 25.5% reported in the previous quarter if not for an $8-million payment to Infosys Foundation, the company said.

The management, however, signalled that employee turnover was worrisome with attrition at 19.5% compared with 18.7% in the previous quarter and 16.9% a year earlier.

Morgan Stanley said in its report on Friday, Infosys revenues were below our estimates; however, the company surprised the street positively on earnings before interest and taxes (Ebit) for the fifth consecutive quarter. The Ebit margins were stronger than expected (even after adjusting depreciation impact) and was helped by cost optimisation initiatives and improved productivity as per management (utilisation ex trainees up by 320bps quarter-on-quarter).

JPMorgan noted that while the company handsomely outperfomed on margins, internals of the results reveal a more sobering picture. Client count in the 100 million plus size is down to 12, and all geographies except US declined QoQ. FY15 dollar revenue growth guidance of 7-9% is retained but this now includes currency lift of 50 bps gained this quarter. The company's guidance is, however, lower than Nasscom's projection of 13-15% for the Indian IT industry.

Infosys' consolidated net profit for the quarter grew 15.3% to $482 million from $418 million in the year-ago period, while it had reported profit of $487 million in the January-March stretch. Revenue for the quarter was at $2.1 billion, a growth of 7.1% year-on-year from $1.9 billion and a 2% increase sequentially from $2.09 billion.

Outgoing CEO SD Shibulal said he was handing over a stronger Infosys to new CEO Vishal Sikka. It has been a great ride and I enjoyed every minute of it. The transition is in progress and is a systematic process, he said. When I took over in August 2011, we were faced with a number of external and internal challenges. The 3.0 transition is now complete and only the execution is waiting to happen. FY14 growth has been double that of FY13 and margins are moving in the right direction.

Shibulal, while referring to visa-related cases filed in the US, dismissed ex-employee Jack Palmer's new complaint as a repetition of issues that were tried and dismissed by the US Federal Court in 2012.

In rupee terms, Infosys' net profit grew 21.6% year-on-year to Rs 2,886 crore compared with Rs 2,374 crore, while it declined 3.5% sequentially from Rs 2,992 crore. Revenues grew 13.3% to Rs 12,770 crore versus Rs 11,267 crore in the corresponding period a year ago. Revenue declined 0.8% from Rs 12,875 crore in the January-March period.

Rajiv Bansal, chief financial officer, said, We improved operational performance as a result of our cost optimisation initiatives and a focus on increasing productivity and utilisation. This partially offset the impact of compensation increases for our employees this quarter.

He added that the company has put in place a robust cost structure to keep the margins under check. While margins might vary, it will be roughly around the 25% mark, he said. We are not worried about the margins. Growth will help us maintain the margin, he said.

CLSA in its note stated: Infosys reported another steady quarter with management focus on cost optimisation and fixing the core of the business (onsite mix, utilisation) that lead to 100bps margin surprise. The incoming CEO has his work set out now focusing on streamlining strategy incorporating the right mix of SMAC/digital with commodity services (ADM/Infra/BPO) while managing the decline in ERP spending, and steadying the ship.

Infosys added 61 new clients during the quarter totalling a deal size of $700 million. We saw positive trends in our large deal wins during the quarter. We believe that this momentum will hold us in good stead as we focus on increasing volumes, said UB Pravin Rao, chief operating officer.

North America, which contributes 60% in revenues for the company, grew by 3.7% sequentially while Europe declined by 1.1% during the same time period. The India market continued to decline by a substantial margin of 6.9% even as the rest of the world market grew by 1.9% sequentially.

The financial services and insurance segment grew 1.8% sequentially whereas manufacturing posted a robust growth of 2.6%. Retail and life sciences grew 2.1%, while energy, utilities, communication and services grew by 1.6% quarter-on-quarter.

Infosys had 1.61 lakh employees on its roll as on June 30. The net addition for the quarter was 879 as against 2001 employees during the preceding quarter. Employee attrition rates are worrisome and we are implementing various initiatives to retain good talent, said Rao.