Infosys trains guns on revenue growth, reinvests currency gains

Profit dips as company concentrates on reviving revenue growth, operating expenses up 22.5% q-o-q

The fallen bellwether of the technology sector has a strategy in place to reclaim its lost position. For the second consecutive quarter, Infosys has beaten the Street's estimates on revenue growth, even though net profit has declined both sequentially and annually by 8.4% and 11.1%, respectively, to $383 million.

The company's dollar revenues have grown by 3.8% sequentially and 11% annually to $2.06 billion. The uptick in revenue is not reflected in the net profit because the company has increased expenditure in the sales engine while other income has fallen during the quarter.

Even though the rupee declined 11% in Q2, operating margins have declined by 170 basis points to 21.8% in Q2 as most of the gains from currency have been reinvested in the business. Operating expenses are up 22.5% sequentially and 31% annually to $278 million in Q2, which has also dragged down its operating profit both annually and sequentially.

The focus of the company is entirely on revenue growth, says Dhananjay Sinha of Emkay Global, as it has reinvested most of the gains into the business, which is a good thing.

The company has also created a new vertical to focus on deal wins in emerging geographies like China, Japan, West Asia and South east Asia. The new deal win vertical will have heads for different geographies and will function as separate profit and loss account.

Analysts are likely to upgrade earnings estimates later in the year and for now they have given a thumbs up to revenue growth.

The company's reported a volume growth of 3.1% and the 0.7 per cent remaining uptick in revenues is driven by improved realisations. Given the strong set of numbers in Q1 and Q2, Infosys has revised its revenue growth guidance to 9-10% from the earlier 6-10%.

This implies that the company's revenues would decline by 0.8% in Q3 and Q4. The company is taking a cautious view as the second half is likely to be weaker due to the holiday season, furloughs, US shutdown and possibility of weak retail sales.

The most promising part of this quarter is the traction Infosys is seeing in the large deals segment, which has driven top line growth. The company is focusing on big data and cloud which has helped drive revenue flow in the current quarter. The company along with its subsidiaries added 68 clients.

Also, Infosys is working on improving margin trajectory through improved utilisation levels. Infy's utilisation levels are up 77.8% in Q2 from 75.9% in Q1 excluding trainees. The company hopes to take this to 82 per cent levels over the coming quarters.