Analysts question Infosys's modest guidance in conference call

The top management of Infosys answers analysts' questions in a conference call

IT major Infosys today reported a 4.1% uptick in Q4 net profit at Rs 2,992 crore on a sequential basis. Excerpts from the confernce call:

SD Shibulal: The revenue growth in FY14 was at 11.5% despite a decline in Q4. Revenue was at lower end of the guidance due to unexpected rampdowns. Revenue growth in constant currency was at 12.4%.

Utilisation, including trainees, for consolidated IT services was 73.6% in FY14, compared to 69.5 per cent in FY13. Operating margins expanded for 2 quarters. Revenue productivity declined 0.8%.

BG Srinivas: In financial services, we have seen a weakness in momentum and some instances of budget cuts resulting in volume cuts. We are seeing opportunities in cost optimisation and client facing services. Big data and cloud are main focus with our clients. Banks continue to focus on risk and compliance due to regulatory changes. Increase in platform solution, predominant focus on cost optimisation through leveraging cloud.
In manufacturing, Q4 growth suffered due to breaks in spending and some budget cuts. High tech continues to see challenges but we are seeing an increase in spends by automotive. Overall momentum in manufacturing remains stable.
 
In telecom we are focused on spending to improve customer experience. Clients are also spending on virtualisation and cloud based technologies.
 
We signed four large deals and pipeline for deals in Europe and US remain relatively robust we are looking at decision making cycles. About 25% of revenues are now coming from Europe which is a milestone.

Rajiv Bansal: Rupee appreciation impacted margins negatively by 0.2% in Q4. Higher dividend payout to impact EPS by Rs 1.5 per share. 

Your steady announcement of large deals is at odds with commentary on revenues of Q4 and FY15.
Large deals have a span of five-seven years and revenues get realised over a period of time. In terms of numbers to achieve higher growth we still have to get there. We have won $700 million this quarter. You have to win $4 billion in deals to earn $800 million revenues next year. We have to focus on automation to improve billing.

You have given a guidance of 7-9%. What kind of seasonality are you expecting?
We have considered all factors and we are coming out of a low momentum quarter. When we come of low momentum Q4 it impacts growth for next year. If the fourth quarter grows at 2-3% it has an impact on new fiscal. We expect these factors of seasonality to impact in first half which is what has been factored in. Q3 is softer than other quarters and Q2 is stronger and we expect similar seasonality.

In the last three months demand has deteriorated. While deal pipeline has improved, we see clients are focused on cost. The ability to take decision on discretionary spend is impacted. We have de-grown 20% on discretionary spends quarter on quarter. Certain clients are faced with serious challenges. Decision cycles are longer and clients faced with their own business challenges.

 
Repeat revenues have declined this quarter like it had in FY12, what is the reason for that?
Shibulal: Repeat business is reset at first quarter of the fiscal. It will keep coming down as the year progresses as new business comes in. I will come back and answer this.

In absolute terms too repeat business has declined.
Shibulal: Minor fluctuations in repeat business are likely

Are there any negotiations on delayed projects coming back?
Retailers saw impact of weather and offered discounts. Shoppers did not come out to shop. Some retailers went through credit card data theft, the net result was that clients whose projects were cancelled and postponed, now project ramp ups. March sales have touched record levels and Retail Federation in the US has projected sharp uptick in sales. We see deals converting and projects ramping up. There is no reason for reversals, which is why we are calling Q4 a one-off quarter.

What is expected from financial services?
If you see Q1 of financial services, there is a degree of slowdown. Most banks have seen challenges in fixed income business and that explains part of the softness in business. We see slight weakness in America and a pick-up in Europe.

Broader business has suffered due to bad weather. Should we see this level of sensitivity to macro events or only retail will be impacted?  
Our revenue profile is very different from industry. Average revenue from discretionary spend is 19%, while our revenue share from discretionary is 33%.  Our share from discretionary spends is very high also because of Lodestone acquisition. Clients’ view on discretionary spend will have an impact on us.
 
Given the higher demand for H1B visa, could costs rise?
At this point we have adequate H-1B visas. The percentage of application of acceptance is not known. Last year we had a good percentage of acceptance. Also we need to hire in local markets.
 
Can you give us a sense of time frame on CEO transition?
All I can say is that the nomination committee has already taken up names and the rest of the details can only come from them.
 
The guidance on margins is 24% in FY15. Given that cost optimisation benefits are likely to continue, what has resulted in you giving a lower guidance on margins?
We have not given a guidance but we expect it to be in line with FY14. We see 200-300 basis points impact in Q1 on margins due to wage hikes. I would believe margins would be determined by the revenue growth, investment opportunity and how other things play out. If you see industry growth, margins would be 25-26% and the 24% margins would be in line with FY14.

Attrition has not moderated?
Attrition has not moderated. We have increased compensation and invested in employees too. We expect attrition to moderate. We are seeing a tail effect. This is also an industry phenomenon. Since we invest a lot in training, our people are in demand.

Is there any change in the hedging strategy in the coming year with the markets expecting rupee to appreciate with the new government?
Our hedging strategy is working. We will continue with short-term hedges.