Analysis: "Enthused and energised" Infosys puts the brake on flow of bad news

Lodestone helps bump up sequential revenue growth to 2.7%, operating margins may fall by 300 bps in Q2 on wage hikes

The commentary from the top brass of Infosys continues to be cautious but the management appears to be visibly “enthused and energised.” While nothing much seems to have changed as far as the market reality is concerned, the sequential contraction in revenues has seemingly stopped. Possibly, the newfound energy has helped the company report a sequential revenue growth of 2.7 per cent in dollar terms to $1.99 billion and 3.4 per cent in constant currency. The net profit growth, however, continues to be muted. For the quarter ended June 2013, net profit in dollar terms declined 5.9 per cent sequentially to $418 million and remained flat year-on-year.
 
Analysts say that the bump-up in revenue growth during this quarter too has come from Lodestone. Lodestone revenues have growth at 30 per cent quarter-on-quarter. However, neither the company nor the market are looking at extrapolating this growth and increasing the full year’s revenue growth guidance range from 6-10 per cent levels. Going by the decline in the rupee, earnings estimates in rupee terms may be increased by a couple of points, but that is where the good news ends. Analysts expect the company to report revenue growth of 1-1.2 per cent over the next three quarters.
 
While the overall commentary remains as “cautious” as ever, the company has reported seven large deal wins in Q1, of which some are over $100 million in size. However, the management expects revenues from these deals to flow in over the next three to five years. Overall, the company and its subsidiaries added 66 clients during the quarter.
 
However, other indicators don’t look as promising. Thought the company’s operating margins have stayed flat sequentially at 23.5 per cent, the impact of the wage hikes will kick in from the second quarter. Rajeev Bansal, chief financial officer of Infosys, expects an impact of 300 basis points on the operating margin next quarter, which would offset the earnings uptick from a falling rupee.