Infosys results surprise again, now pleasantly

Written by fe Bureau | Bangalore | Updated: Oct 11 2014, 06:54am hrs
InfosysThe Infosys stock surged on the news of the bonus issue, gaining 6.68% to close at Rs 3,888.95.
Infosys on Friday surprised the Street, reporting a good set of numbers for Q2FY15 and announcing a 1:1 bonus issue. Net profit at Indias second-largest IT exporter grew by 6% sequentially to $511 million on higher volumes and the highest ever employee utilisation. The firm retained its revenue growth guidance at 7-9%. The Infosys stock surged on the news of the bonus issue, gaining 6.68% to close at R3,888.95.

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CEO Vishal Sikka promised to create a next-generation services company that would regain its position as the sectors bellwether though he offered no details. Declaring the earnings for the very first time as Infosys CEO, he offered 100% variable pay for all of Infosys 1.65 lakh employees, probably with a view to stem record attrition of over 20%. Industry experts saw the move as steps to win back the confidence of investors and employees alike.

Infosys margins rose 96 basis points in the quarter while revenues increased 3.1% sequentially. Volumes grew at 3% with onsite volumes continuing to show an uptick for the second straight quarter, and utilisation at an all-time high of 82.3%.

The key point is that the 50bps margin beat is high quality, brokerage CLSA wrote in a note. These appear to be positive results both on revenue momentum and margin performance. Sikka appears to have begun well. The better margins came partly from rupee depreciation of 1.3% quarter-on-quarter, tight control of administrative costs and some increase in utilisation and offshoring.

Barclays was, however, disappointed the management hadnt spelt out its strategy.

Details around the changes in sales force, the new go-to-market strategy and focus on SMAC space are the key ingredients of the recovery in revenue growth, in our view, Barclays said.

Sikka told reporters that Infosys which lags Nasscom's FY15 industry growth rate of 13-15% is aspiring to achieve a 15-18% growth rate by FY17, a target set by founder chairman NR Narayana Murthy. He added the company was looking beyond yesterday's paradigm of efficiency, hiring and labour arbitrage to achieve this. We have been in the past a next-generation company and defined many dimensions of business in a service company. I believe we will get back to that level. We will focus on consistent, profitable growth. We aspire to go back to that and again become the bellwether in the Indian IT industry, Sikka said at the earnings press conference.

He added that the firm was renewing every service line and everything it offered on the basis of innovation, automation and bringing artificial intelligence to our offerings. Sikka said he believed these would revolutionise back office, maintenance services, infrastructure management services, verification services and other services that we offer on the basis of technology.

Rajiv Bansal, CFO, said, We have been able to improve our margins in the quarter and feel confident of sustaining these within a narrow band. He added that the company hopes to maintain the operating profit margin around 25%, plus or minus one basis point.

The company had a net addition of 4,127 employees during the quarter, which was higher than the net hiring during the year ended March 2014. UB Pravin Rao, chief operating officer, said the attrition on a month-on-month basis was trending down. In another two quarters, we expect it to be in our comfort zone of 12-14%, he said, adding, We have given 12,000 promotions over the past few months and have been engaging better with employees. We have a focus on educating and reskilling them.

Infosys is sitting on a cash reserve of $5.5 billion and former board members like TV Mohandas Pai and V Balakrishnan had recently called for a share buyback programme. Infosys' consolidated net profit for the quarter grew 33.4% to $511 million from $383 million in the year-ago period, while it had reported a profit of $482 million in April-June. Revenue for the quarter was at $2.2 billion, a growth of 6.5% year-on-year from $2.06 billion and a 3.1% increase sequentially from $2.13 billion. Infosys won seven large deals totalling $600 million in the quarter, of which five were in the US. The North American region contribu-ted 60.8% in revenue for the company, while Europe contributed 24.7%.