Infosys Q2 results: EBIT, status quo on guidance for FY19 worry analysts

IT bellwether Infosys on Tuesday reported Q2 results mostly in line with Street expectations with PAT (profit after tax) coming in at Rs 41.10 billion, up 10 per cent on YoY basis and 13 per cent on QoQ. Revenues for the period rose 17.3 per cent YoY to Rs 206.09 billion. In constant currency (CC) terms, the revenue growth was 8.1 per cent. Sequentially, revenue grew 7.7 per cent in rupee terms and 4.2 per cent in CC terms.

Analysts were expecting PAT to come in the range of Rs 38.75 billion and 41.5 billion while EBIT margin was largely expected to expand by 40 bps QoQ to 24.1 per cent.

In the presser following the announcement of the results, the company said large deal wins were strong during the period and several of its sectors are growing over 10 per cent YoY. The firm sees strong demand in cloud, IoT (Internet of Things), cyber and data analytics. The management informed that attrition is higher in the three-to-five-year experience band and the company is confident that the attrition rate will come down to acceptable levels within the next four to six years.

“Our unwavering focus on strong financial performance on multiple fronts continued to deliver results during the quarter. Operating margins for the quarter as well as for the half-year were at 23.7 per cent, near the top end of our guidance band,” said M D Ranganath, CFO. “Operating cash flow was over $1 billion during the first half of the year and RoE was at 24.7 per cent. We will continue to make strategic investments in digital to leverage opportunities and at the same time keep sharp focus on key operational efficiency parameters," Ranganath added.

Below are the key takeaways from Infosys' Q2 results: 

Financial highlights

The IT major retained FY19 revenue guidance in CC terms at 6-8 per cent, while operating margin guidance was maintained at 22-24 per cent. Digital revenues came in at $905 million (31 per cent of total revenues), year-on-year growth of 33.5 per cent and sequential growth of 13.5 per cent in constant currency terms.

Operating margin during the period was at 23.7 per cent. Also, H1 revenues were up 14.7 per cent in rupee terms and 7.1 per cent in CC terms. Large deal signings in the quarter exceeded $2 billion during the quarter under review.

Basic EPS was Rs 9.45, up 16 per cent YoY and 13.8 per cent QoQ.

Dividend

The Bengaluru-headquartered company declared an interim dividend of Rs 7 per share for the quarter and half year ended September 30, 2018. The record date for the payment has been fixed as Octoer 27 and the dividend will be paid on October 30.

Geography/vertical performance

The company said demand is good in the US and Australia and great in Europe. Revenue growth was broad-based in North America and Europe, at 3.8 per cent and 4 per cent QoQ, respectively, in cc terms. Among verticals too, growth was broad-based led by BFSI and retail which grew 5.8 per cent and 5.9 per cent in cc terms, respectively.

Acquisitions

On September 7 Infosys Consulting Pte Limited, a wholly-owned subsidiary of Infosys, signed an agreement to acquire 60 per cent stake in Trusted Source, a wholly-owned subsidiary of Temasek Management Services), a Singapore-based IT services company, for a total consideration of up to SGD 12 million (about $9 million). That apart, in October, Infosys Consulting acquired 100 per cent of voting interests in Fluido Oy (Fluido), a Nordic-based salesforce advisor and consulting partner in cloud consulting, implementation and training services for a total consideration of up to Euro 65 million (approximately $75 million).

Analysts' take

It is good to see Infosys reporting better QoQ revenue growth in CC than TCS. However, flat EBIT margin is a miss despite rupee depreciation, so is FY19 EBIT margin guidance of 22-24%, said IDBI Capital. "Further, we believe that Infosys is being conservative in maintaining FY19 revenue growth guidance given the Q2 growth, large deal TCV, growth in BFSI and US," the brokerage firm added.

ICICI Securities said that Infosys' Q2FY19 revenue was above its expectations, but there was a miss at the margin on account of higher employee expenses. The highlight for Q2FY19 was strong large deal wins, healthy recovery in BFSI and improvement in digital revenues, it added.