OPM at 26.7%; retains revenue growth guidance at 7-9%
IT major Infosys on Friday beat Street expectations for the December quarter with a 2.2% sequential increase in net profit to $522 million, riding high on a 4.2% sequential volume growth, its best in three years. The IT major also retained its revenue growth guidance at 7-9%, against analysts’ prediction that it would be revised downwards. Its employee utilisation rates for the quarter touched an 11-year high of 82.7%, as the company continued to work on its “renewal” strategy.
Buoyed by the impressive set of numbers, the Infosys scrip gained 5.02% to close at R2073.60 on the BSE on Friday. The third quarter is traditionally a weak one for the IT industry, and the management indicated that pricing was under pressure in traditional services. Operating margin was up at 26.7%, an increase of 60 basis points (bps) sequentially and 170 bps year-on-year, ahead of forecasts helped by cost optimisation and a depreciating rupee.
Infosys’ consolidated net profit for the quarter grew 12.7% to $522 million from $463 million in the year-ago period. Sequentially, profits grew 2.2% from $511 million in the July-September stretch. Revenue for the quarter was at $2.21 billion, a year-on-year growth of 5.6% from $2.1 billion and a sequential increase of 0.8% from $2.2 billion.
“Infosys declared a good set of results with margin performance being the key highlight of the quarter,” said brokerage house JPMorgan. “For recovery stories such as Infosys, we need to monitor the trend of leading indicators of improvement than revenue recovery itself. In this context, we see the leading indicators of improvement at Infosys over the coming 2-3 quarters reflected in declining attrition, increased net hiring, sales & marketing investments, and improvement in client progression metrics. On most of these, we saw improvement in this quarter.”
The brokerage house also said that the relatively broad-based growth was encouraging. “Growth is more diversified and not lopsided. Both bread-and-butter services (except application development & testing) and consulting, package implementation report healthy growth,” JPMorgan said.
The management commentary was upbeat. Said CEO Vishal Sikka, “We are excited by several breakthrough results in Q3. Our ‘renew and new’ strategy is being received well by our clients and our ecosystem and we are already seeing its early adoption. Based on our strong performance, we are intensifying our efforts to deepen employee engagement, client ecosystem and strengthen our foundation of education as we build a next-generation services company that innovates for consistent profitable growth.” The company on Friday also announced an increase in its Innovation Fund from the current $100 million to $500 million in a bid to build a global ecosystem of strategic partners. “My sense is that you will continue to see downward pressure on prices. For the lack of a better phrase, we can attribute that to delivering yesterday’s services and I believe that time for that has come to an end. It will definitely take some time to wind down; nonetheless, the long-term picture is very clear and the future is in looking for more innovation, more productivity and automation. The more we can do in those direction, the better,” said Sikka. “I do see that in the longer term there will a continued downward pressure on these services. That is why we have the emphasis on renewing our existing services with the power of automation and artificial intelligence to improve productivity. I believe that productivity improvement in the existing services as well as complementing them with new services will more than offset the effect of the downward price pressure.”
In rupee terms, Infosys’ net profit grew 13% year-on-year to Rs 3,250 crore compared with Rs 2,875 crore, while it grew 5% sequentially from Rs 3,096 crore. Revenue grew 5.9% to Rs 13,796 crore from Rs 13,026 crore in the same period a year ago. Sequentially, revenue grew 3.4% from Rs 13,342 crore. “Our sequential revenue growth in Q3 was adversely impacted to the extent of 1.8% due to USD appreciation against other major currencies,” said Rajiv Bansal, chief financial officer. “We made required investments keeping in mind short-term priorities and long-term aspirations.”
A report by JM Financial on Friday said, “Infosys results came ahead of estimates driven by healthy volume growth of 4.2% QoQ. Volume growth acceleration in a seasonally weak quarter is commendable, though drop in realization may be a worry. 3QFY15 performance will raise optimism on successful execution of company’s strategy of ‘renew and new’ — ‘renew’ the existing services and create ‘new’ services to deliver emerging technologies.”
UB Pravin Rao, chief operating officer, said, “During the quarter, we saw broad-based volume growth, increased utilisation and strong client additions. We have made a 100% variable payout for Q3 and have seen a further decline in attrition as a result of multiple initiatives taken over the last few quarters.” Infosys saw 8,927 employees leave the company during the quarter as against 10,128 in the July-September stretch.
As an average of the last 12 months, however, attrition rose marginally to 20.4% with the management saying it would a few more quarters for it to stabilise. Infosys had a total employee strength of 1.69 lakh in the quarter ended December, which saw a net addition of 4,227 people.
Infosys and its subsidiaries added 59 clients during the quarter. Financial services and insurance, the largest business segment for Infosys, grew by 1.8% sequentially while manufacturing posted growth of 1.4%. Retail and life sciences grew 1.1%, while energy, utilities, communication and services declined by 1.9% quarter on quarter.
North America, which contributes 61.6% in revenues for the company, grew by 2.1% sequentially while Europe declined by 2.1% during the same time period. The India market grew by 14% while the rest-of-the-world market declined by 2.3% sequentially.