5 key takeaways from the Infosys results

The first quarter is an important one and a drop in this quarter leads to a fall for the full year as it becomes difficult to cover lost ground

It does not take the markets too long to analyse Infosys’ results. Within seconds of announcement of the results, the stock price reflects what the market thinks about it. It was a poor start for Infosys for FY17 with the first quarter number missing analysts’ expectation on the revenue front. The markets showed their disappointment by pushing the stock 9% lower. The June quarter numbers came as a surprise, especially when market was getting complacent on Infosys beating expectations as it did in it last four quarters.
 
Apart from revenue there are some more disappointments in the quarterly numbers. Here are five key takeaways from the Infosys results.

 
1.  The company reported 2.2% QoQ  growth in dollar revenues but a 1.7% growth in constant currency terms which was mainly on account of lower volume growth which grew by 2.2% as compared to 2.4% in the previous quarter. Justifying the lower-than-expected numbers, Infosys CEO Dr. Vishal Sikka said “We had unanticipated headwinds in discretionary spending in consulting services and package implementations as well as slower project ramp-ups in large deals that we had won in earlier quarters, resulting in a lower than expected growth in Q1.”
 

2. What spooked the market further was lowering of its annual guidance. The company has now lowered its guidance to 10.5-12% in constant currency terms against market expectation of 11.5-13.5%. The company’s management said that the first quarter is an important quarter and a 1% drop in this quarter will lead to a 1% fall for the full year. It becomes difficult to cover the ground lost in the first quarter. Sikka in his media interaction said lower guidance is on account of weaker spend in consulting and macroeconomic uncertainties.

 
3. Lower discretionary spend led to an increased in competition which resulted in pricing pressure as seen in a 0.2% drop in constant current term on a YoY basis. This to some extent impacted EBITDA margins which declined by 153 basis points QoQ to 26.5%. Margins were also hit by partial wage hike leading to a hit of 1.4% and visa costs impacting 0.6%, resulting in a sequential decline of 4.5% in net profits to Rs 3,436 crore during the quarter.
 
4. Another disappointing data point is the high rate of attrition. Sikka’s entry in the company had reduced the high levels of attrition, but the trend again seems to have changed. Attrition at consolidated levels stood at 21% per as compared to 17% in the previous quarter. Infosys’ CFO in his media interaction says that he is not unduly worried about the high level of attrition and pointed out the fact that attrition among high performers has come down from 13% to 11%. However, market would be looking at the overall number with suspicion.

 
5. There were some positive points too in the company like the higher level of utilisation which increased to 80.5% (excluding trainees) as compared to 80.1 per cent in the previous quarter. Also the company has maintained its margin guidance and said that there has been no slowdown in winning large deals. Sikka also pointed out that the new strategy implemented by his team is working out well and would be looking at making software and automation an integral part of the business.
 
To add to the trouble is the unforeseen impact of Brexit which the management has not yet account for in their guidance for present year.