Guidance cut to keep Infosys stock under pressure

Progress on CEO's appointment a key monitorable

Infosys has disappointed the Street as the IT major reported a muted performance in the September quarter (Q2). 

The company’s revenues at Rs 17,567 crore, up 2.2 per cent in constant currency terms, was lower than analysts’ estimates. The growth was led by 1.6 per cent of volume gains, while the rest came from higher realisations or pricing.

Among businesses, growth was driven by its large verticals of BFSI (banking, financial services and insurance), manufacturing and hi-tech, retail and life sciences. The company indicated that BFSI, which accounts for a third of its revenues, might see a soft December quarter due to seasonal factors, while the retail segment is exhibiting a slowdown in growth.

The operating performance, however, was better than expected. Despite the impact of wage hikes in Q2, the company improved its operating profit margins to 24.2 per cent, from 24.1 per cent in the June quarter. 

Analysts had expected the margin number to come at 23.6 per cent. A large part of this was due to higher utilisation levels, which for the reporting quarter stood at an all-time high level of 84.7 per cent, compared with 84 per cent in the June quarter.

The utilisation levels have been going up from the December 2016 quarter. Margin levers for its peers, too, have been higher utilisation and automation. 

A higher share from the new services, including the digital segment, which has grown 110 basis points (bps) quarter-on-quarter to 9.4 per cent, may buoy margins going ahead. The better operating performance translated to a net profit of Rs 3,726 crore, up six per cent sequentially, against estimates of Rs 3,600 crore. 

The key, however, is a cut in the full-year guidance by up to 200 bps to 5.5-6.5 per cent. The company had given a FY18 constant currency revenue growth guidance of 6.5-8.5 per cent. 

Most analysts had expected a cut in guidance (100-150 bps), given a muted commentary by the management on the prospects of the BFSI space, the largest vertical for IT companies, including Infosys, in the US market.

The results were announced after trading hours, the first time for Infosys. The stock, which fell 1.4 per cent, could see some downward pressure, given the cut in guidance. Infosys’ American Depositary Receipts listed on the NYSE in the US, were down 3.6 per cent around 8 pm IST.

However, a positive for the company is that it maintained its margin guidance of 23-25 per cent for the financial year. Another is the reaffirmation of previous findings of external investigations, which found no wrongdoing by the company’s earlier top executives. This related to the acquisition of Panaya and severance payments to its former chief financial officer. 

The major developments the Street will watch out for are the appointment of a new chief executive officer and the progress on the implementation of the strategies highlighted by its non-executive chairman, Nandan Nilekani, after the Q2 results.