Infosys on a roll in Q3

Volume growth of 4.2% in Dec quarter best in 3 years; firm keeps FY15 guidance unchanged

Infosys's earnings for the quarter ended December 2014 have surprised the Street, with a marked improvement in many parameters - volume growth (growth in billed man-hours in a quarter), profit margin and employee utilisation. However, the growth in revenues was largely in line with a seasonally weak quarter, one with many holidays and client furlough.

While the volume growth of 4.2 per cent during the quarter was the best in the past three years, the company maintained its full-year revenue growth estimate of seven-nine per cent. Infosys said its estimate was based on the currency exchange rate on September 30 last year. This, it added, was because of late, it had witnessed immense currency volatility.

For the quarter ended December, the company's net profit rose 13 per cent year-on-year to Rs 3,250 crore, while net sales increased 5.9 per cent to Rs 13,796 crore. On a quarter-on-quarter basis, the net profit rose 4.9 per cent, while revenue increased 3.4 per cent. Earlier, a Bloomberg survey based on the forecast of 29 analysts had estimated net profit at Rs 3,160 crore.

The markets cheered Infosys's earnings, with the stock closing at Rs 2,073.6 on BSE, up five per cent, on a day when the market was largely flat.

"Infosys posted better-than-expected revenue growth for the quarter ended December 31, 2014," said Frederic Giron, vice-president and research director at Forrester Research. "The new Infosys strategy, along with (chief executive officer and managing director) Vishal Sikka's efforts to visit about 500 clients through the past two quarters, is starting to bear fruit. The 'renew and new' strategy is resonating well with clients that need help in defining and executing their digital transformation strategy," he added.

Rajiv Bansal, chief financial officer, said, "For the past three weeks, I was trying really hard to forecast currency (movements). But (Vishal) Sikka told me not to do so because we were in the information technology services business, not in the business of forecasting currency…In such a volatile currency environment, it is not wise to forecast. We don't want to keep revising our guidance. We have maintained it from April 2014. We believe it is right for the company to give a forecast and stick to it, rather than revising it every quarter."

During October-December 2014, the euro, the pound and the Australian dollar depreciated six per cent, five per cent and 7.8 per cent, respectively, against the US dollar. "High volatility in currency forced the company to change its guidance stance - FY15 revenue guidance is maintained at seven-nine per cent growth in US dollars, provided we assume the exchange rates of September 30, 2014. We estimate at December 31 exchange rates, this will translate to six-eight per cent growth, in dollar terms," Barclays said in a note after Infosys announced its earnings.

Despite the cross-currency headwinds and seasonal weakness, the company's operating profit margins expanded 60 basis points to 26.7 per cent on a sequential basis. The company added 59 clients during the quarter, including three large ones.

"We are excited by several breakthrough results in the third quarter. Our 'renew and new' strategy is being received well by clients, as well as by our ecosystem, and we are already seeing its early adoption," Sikka said. "Based on our strong performance, we are intensifying 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."

Attrition, a cause for concern for the company through the past few quarters, rose to 20.4 per cent in the December quarter from 20.1 per cent in the previous quarter, on a last-12-month basis. In absolute terms, however, attrition during the quarter fell to 8,927 from 10,128 in the September 2014 quarter.

Employee utilisation, including of trainees, stood at 75.7 per cent during the December quarter, against 75.2 per cent in the previous quarter. Excluding trainees, it stood at 82.7 per cent, the highest in 11 years.

"During the quarter, we saw broad-based volume growth, increased utilisation and strong client addition," said U B Pravin Rao, chief operating officer. "We have made 100 per cent variable payout for the quarter and seen a further decline in attrition as a result of multiple initiatives taken through the past few quarters."

Geographically, the quarter was a mixed one for Infosys - the company saw 2.1 per cent sequential growth in North America, while European operations contracted 2.1 per cent. At 14 per cent, the company's sequential growth in India was high. Rest-of-the-world operations contracted 2.3 per cent.

Infosys recorded a slump in the energy vertical and slower growth in the retail segment, while most other sectors saw growth. During the December quarter, the company's financial services and insurance segment grew 1.8 per cent sequentially, while manufacturing expanded 1.4 per cent. The retail and life sciences segment grew a tepid 1.1 per cent, while energy, utilities and communications fell 1.9 per cent sequentially.

The contribution of top clients to the company's overall revenue declined to 3.2 per cent from 3.4 per cent in the September 2014 quarter.

The Infosys management has said spending by clients is likely to remain mixed this year, with some sectors showing an uptick in budgets, while others are seeing a decline.

During the December quarter, the company saw some pressure on pricing, which it expects will continue in the coming quarters.

GETTING BETTER

• Company maintains FY15 revenue growth estimate at 7-9%, against apprehension of a cut in the forecast
   
• Makes 100% variable payout during the quarter
   
• Utilisation rate (excluding trainees) at 82.7%
   
• Attrition marginally up at 20.4% (on LTM basis); but in absolute numbers, it fell to 8,927 from 10,128 in Q2