The country’s second-largest software services exporter, Infosys on Friday beat estimates by registering a 3.3% sequential dip in its net profit to Rs3,483 crore during the April-June quarter. While the company maintained its constant currency guidance at 6.5-8.5%, it revised it upwards in dollar terms to 7.1-9.1%. The better-than-expected earnings were on the back of new services like cloud, big data, analytics and IoT, which were started in April 2015 and have started generating revenues. During the period, new service lines accounted for 8.3% of its total top line. CEO Vishal Sikka said that new services accounted for more than half of its revenue growth, signifying a shift in demand.
In terms of verticals, though BFSI continued to be subdued, the company expects a pick-up in the second half of the fiscal. Revenues during the quarter dipped marginally by 0.2% to Rs17,078 crore sequentially, impacted primarily by the rupee’s appreciation, dragging the Infosys share marginally down by 0.44% to Rs972.05 on the BSE on Friday. Volumes growth stood at 1.7%, much like the previous quarter. In dollar terms, there was a 0.4% sequential dip in its net profit to $541 million compared with $543 million in the previous quarter. The real spurt was in its revenue growth of 3.2% in dollar terms, much higher than the expectations of around 2.6%.
Infosys’ operating profit margins (OPM) came in at 24.1%, which was 50 basis points lower than what it had reported in the previous three months. The company had guided to an OPM range of 23-25% for FY18. In contrast, Tata Consultancy Services (TCS), which announced its results on Thursday, had reported a 10% sequential drop in net profit with a 236 bps decline in margins and revenues dipping by 0.2%. Volumes growth at TCS for the quarter grew 3.5%.
Brokerage house JPMorgan in its note following the Infosys results said, “After continual pricing decline, it was nice to see a pricing uptick (onsite pricing up 1.2% Q/Q CC while offshore pricing up 2.3% Q/Q CC) although we will not read much into a quarter’s uptick.” The Ebit margins at 24.1% was a surprise though largely as a result of watertight utilisation, JPMorgan added. Infosys attributed the better-than-expected performance to “operational rigour” which saw employee utilisation rate going up by 2% in a period of three months while a tight lid was kept on its capital expenditure.
During this period, an appreciating rupee impacted margins by by 90 bps though this was mitigated through the benefit of higher utilisation. Commenting on the company’s performance, Sikka said, “Our persistent focus on execution in Q1 is reflected in broad-based performance on multiple fronts — revenue growth, resilient margins despite multiple headwinds, healthy cash generation and overall business results.”
Infosys has cautioned that wage hikes effective July could impact its OPM by 1% in the second quarter. The average hike has been around 6%. Infosys has also written down its $11-million investment in US-based start-up DWA Nova. The company witnessed all-round growth across geographies and business verticals. In particular, the India geography saw a 14.7% sequential growth in revenue while most of the geographies, except for North America, grew higher than the company’s average. JPMorgan sounded a note of caution on the performance of the BFSI vertical, which is the largest revenue-generating segment for Infosys. “The softness of BFSI at both TCS and Infosys has implications for FY18 growth for these firms as well as for the sector. Expectations early into CY17 of a BFSI-led cyclical uptick are not materialising,” it said.
Infosys COO UB Pravin Rao said the deal pipeline for the quarter was valued at $800 million, the same as in the previous quarter, with a significant percentage of revenue coming in from renewal deals. On the human resources front, Infosys saw its total headcount declining by 1,811 at the end of the June quarter with the total employee strength now at 1,98,553 employees.