Top brass is cautious but Infosys Ltd outlook cheers Street

Written by fe Bureau | Bangalore | Updated: Apr 17 2014, 01:33am hrs
InfosysStock rises as company ups dividend payout ratio to 40% from 30%. PTI
Infosys Ltd dollar revenue guidance of 7-9% for FY15 surprised the Street on Tuesday, given how just a month back the IT major had indicated some loss of momentum in near-term revenues. In mid-March, Infosys had said profits in Q4FY14 might come in lower than anticipated since certain verticals werent yielding enough sales. However, while the outlook for the top line enthused investors, they remained cautious on margins.

Infosys beat Street estimates for Q4FY14, but analysts pointed out that the performance had come from savings in costs rather than growth in the top line; the sequential de-growth in revenues, they said, was disappointing. Dollar revenues came in at $2.09 billion, a fall of 0.4% sequentially, while profits grew 5.2% sequentially to $487 million.

Indias second-largest software services exporter posted better-than-expected Ebit margins of 25.5% for Q4FY14 up around 50 basis points sequentially, helping the bottom line grow 4.1% (in rupee terms) over the December quarter to R2,992 crore.

Management commentary was cautious. BG Srinivas, president, observed that there were signs of recovery in the US and while it might be a slow one, the uncertainty had reduced. Srinivas added that the situation in Europe is low-key but stable. We dont see the situation as it was when the crisis in Greece broke out. At the same time, top line forecasts are pretty muted, theres no extraordinary growth and so there is a focus on costs, he told FE. Srinivas, tipped to be in line to succeed SD Shibulal as MD&CEO, pointed out that regulatory pressure was also impacting clients, besides risk management and security issues.

Apart from the weak top line, analysts were also disappointed with metrics such as attrition which despite two recent salary hikes climbed to 18.7% from 18.1% in Q3FY14. Viju George of JPMorgan pointed out that attrition at the mid-level hurts execution and day-to-day operations. Infosys will have to ensure that its attrition controlling measures have the desired effect as quickly as possible, George wrote in a report.

Others like Ian Marriott, vice-president, Gartner are not sure that the company is focussed on the right areas. The company has not taken bold steps to regain the momentum and thats a worry. The reality is that the markets are shifting to cloud and analytics, but the companys thinking is slightly behind the curve, Marriott observed.

With Infosys announcing a higher dividend payout ratio of up to 40% of post tax-profits effective FY14, up from the current 30%, the stock rose 4.7% on the Bombay Stock Exchange soon after the earnings announcement but closed at Rs 3,260, a gain of 0.76% against the overnight close. The company has cash reserves of just over Rs 30,000 crore.

Infosys guidance is lower than Nasscoms projection of 13-15% growth for the industry in FY15 and also below its own growth rate of 11.5% in FY14, when revenues crossed Rs 50,000 crore and net profit crossed Rs 10,000 crore. Infosys added 50 clients during the fourth quarter of FY14, taking the tally to 890. SD Shibulal, CEO and MD, said that many of the companys clients in the retail and hi-tech manufacturing spaces were facing margin pressures and consequently paring spends. He added that clients were optimising costs and cutting down discretionary spends.

The company has improved its employee utilisation including trainees rate marginally to 74.4% as against the 74.1%, it reported in the previous quarter. Utilisation rate has improved by 4% over the previous fiscal at 73.6% as against the 69.5%, it reported for the previous fiscal. The utilisation rate excluding trainees stood at 78% at the end of FY 14. Infosys added a net 2,000 employees during the quarter with the total number of employees on its rolls rising to 1,60,405. The IT sectors largest market, North America showed a decline of 0.8% sequentially for the company. Europe grew by 1% q-o-q while demand from India remained flat at 0.1%. The rest of the world also saw the demand declining by 1.5% for the same period.