RESULT ANALYSIS: Infosys

The revenue and earning commentary for FY12 sent the stock tumbling over 5%

The revenue and earning commentary for FY12 sent the stock tumbling.

Infosys Ltd reported a 3.2% quarter-on-quarter (q-o-q) revenue growth to Rs  7,485 crore for the June 2011 quarter, 1.4% higher than top level of guidance given last quarter based on  4% volume growth, flattish pricing and favourable forex trends.

This restricted the operating margin compression to 290 basis point (bps) q-o-q basis to around 26% against an expectation of a 400 bps compression even as utilization stayed low and wage hikes and salary costs impacted performance. The net profit at Rs 1,722 crore was 5% lower sequentially and 16% higher than the same period last year.

CAUTIOUS TONE

Infosys’ management retained a cautious tone, leaving FY12 revenue guidance (in common currency terms) unchanged contrary to expectations of strong revenue growth outlook based on robust commentary by global peers.

The company has guided for a modest sequential increase in revenues for the next quarter (Q2FY12) ranging between 2.9% to 4.3% in rupee terms. It, however, expects margins to contract 250 bps this year (FY12), as against a guidance of 300 bps given earlier. The EPS growth guidance has been revised higher by 150-200 bps to 10-11.5% in common currency terms.

Click here to read Q&A with Sanjeev Hota, Asst. Vice President Research (IT), Sharekhan on Infosys' results

Sequentially, the operating margins are projected to stay flat in Q2FY12 as Infosys sees an 80 bps impact from hardening rupee even as pricing stays flat. Utilisation is also expected to stay near present low levels of around 72-73 % given the strong hiring plans for the quarter (around 1,200 employees in Q2FY12), despite the muted outlook. Management will re-look at this strategy if the utilisation dips to 70%.

Management indicated that although business confidence was high, sovereign risks in Europe and low consumer sentiment had led to cautiousness in the environment. Although the most corporates have already set their IT spending budgets, the management cited incidents of delays in spending given the volatile atmosphere but overall expected budgets and pricing to stay stable.

GROWTH

While consolidation-driven discretionary spending in the BFSI space has slowed down, as per the management, the risk and compliance-driven spending continues to drive growth. The telecom vertical, which saw revenues dip 8 % sequentially, is expected to bottom out next quarter.

Going ahead, growth will be evenly balanced through the year and not frontloaded. The company added 26 new clients this quarter, with six in the $50 million plus bracket and reiterated a strong pipeline with significant large and transformational deal wins.

The stock ended 4.3% lower at Rs 2,795 to about 20x consensus FY12 EPS estimates. The good news is that the organizational restructuring is nearly complete allowing fresh impetus on client and deal acquisition strategies.

Analysts believe that the stock performance will be linked to global news-flow and improved revenue growth outlook with stability in Europe and higher consumer confidence in the US and Europe being monitorables.