Changes capital allocation policy to distribute 80% free cash-flows to shareholders via dividends, buybacks over 5 years
Infosys on Friday kicked off the new financial year on a strong note, even as rival Tata Consultancy Services (TCS) reported a soft quarter. Not only has the company bumped up its revenue guidance for the full financial year, it has also decided to distribute 85% of free cash-flows to shareholders through dividends and buybacks over a period of five years against 70% earlier. Analysts believe that the June quarter’s performance should drive up consensus estimates for the full year.
The country’s second largest IT services company bumped up its guidance for the fiscal to 8.5-10% from the from 7.5-9.5%, on the back of its strong performance. The company’s net profit increased 5.3% on a year-on-year basis, while it declined 6.8% sequentially to Rs 3,802 crore. Revenues for the quarter ended June 2019 grew by 14% year-on-year and 1.2% sequentially to Rs 21,803 crore. In constant currency, revenues rose 12.4% y-o-y and 2.8% sequentially. The company has also signed large deals worth $2.7 billion, which is the highest so far. The company had exited FY19 with total contract value of $6.28 billion.
Operating profit declined 1.5% y-o-y and 3.2% q-o-q to Rs 4,471 crore. Operating margin was 20.5%. Digital revenues — which now account for 35.7% of total sales — grew by 41.9% y-o-y and 8.6% sequentially.
While the company exited the June quarter with operating margins at 20.5%, the management has maintained that for the full year the margin guidance at 21-23%.
Commenting on the company’s performance during the quarter, Salil Parekh, CEO and MD, Infosys, said, “We had a strong start to FY20 with constant currency growth accelerating to 12.4% on year-on-year basis and digital revenue growth of 41.9%. This was achieved through our consistent client focus and investments, which have strengthened our client relationships. Consequently, we are raising our revenue guidance for the year”.
Effective from FY20, the company expects to return approximately 85% of free cash flows cumulatively over a five-year period through dividends, share buybacks or special dividends. Commenting on the same, Nilanjan Roy, CFO, Infosys said, “Continuing our objective of improving shareholder returns, we have revised our capital allocation policy upwards to distribute 85% of free cash flows cumulatively over a 5-year period”.
Both in terms of geography and verticals, Infosys has reported healthy double-digit growth year-on-year in constant currency. For instance, the financial services vertical has grown by 11.3% in constant currency year-on-year, communications grew 22.6%, energy grew utilities by 17.7% while hi-tech grew by 14.6%.
Even geographically, the company reported double-digit growth across regions other than India.
Attrition remained elevated at 23.4% (annualised consolidated) in the June quarter. The company does not expect high attrition to impact the stability of the company.
Infosys continues to command a lower valuation compared to TCS. At Friday’s close of Rs 727.10, Infosys stock now trades at a price-earnings (PE) multiple of 18.34 times to the estimated one-year forward earnings, against the TCS PE of 22.63 times. The valuation gap between the two had reached at its peak in September 2018.
However, Infosys stock has outperformed the benchmark index so far this year, with a gain of 10.8%. The Sensex has yielded a return of 7.4% during the same period. With the first quarter’s performance, Infosys could narrow the valuation gap further.