Has Infosys got its mojo back?

Company surprises market by reporting a margin expansion of 148 bps, even as revenue growth remains tepid

Infosys seems to have got its mojo back, if its December quarter performance is any indication. Last June, soon after returning to the company, N R Narayana Murthy had conveyed the company’s revival would be driven by optimisation of costs, sales and delivery. Its cost optimisation drive was expected to yield results in six months. The current quarter suggests his assessment was correct, as Infosys has reported a 148 basis points (bps) expansion in operating margins, even as revenue growth remained tepid.

Many have doubted the company’s ability to turn around in the current environment, where clients are very focused on deliverables and competition has stolen a march over it. What is visible is that the company’s hunting for growth in new geographies and sectors. This is apparent from the steady fall in revenue per client over the past eight quarters. The company claims it is because the pool of clients has increased and become more diversified. While the jury is still out on the reinvention of Infosys in this new marketplace, what is apparent is the improvement in operational metrics. In the third quarter (Q3), Infosys reported a decline of 16.2 per cent in total operating expenses, which have pushed operating margins up by 148 bps sequentially to 25 per cent.

Given that the third quarter is known to be weak, the firm’s dollar revenues grew by 1.6 per cent sequentially to $2.1 billion. While revenue growth was marginally below expectations, the spike in margins and earnings per share more than made up for the disappointment. Driven by margin expansion, net profit soared by 21 per cent sequentially to $463 million as operating costs were curbed. The company has revised its dollar revenue growth guidance to 11.5-12 per cent from its earlier FY14 guidance of 9-10 per cent. Emkay Global says: “Full-year revenue growth guidance has been increased to 11.5-12 per cent, which will imply a 0-1.3 per cent sequential growth in the March quarter, unlike the earlier outlook which implied a sequential decline.”

Signs of recovery are also evident in client additions. The company has added 54 new clients during the third quarter, of which 15 new clients are in the $100-million bucket. Total contract value of the deals has also risen from the year-ago period, which implies that client confidence is returning. The company has also improved its utilisation from 73.7 per cent in the second quarter (including trainees) to 74.1 per cent. Excluding trainees, the company’s utilisation level has moved up to 78 per cent in Q3 from 77.8 per cent in Q2. In the year-ago period, the company’s utilisation stood at 70 per cent including trainees and 73.2 per cent excluding trainees. The company believes it can improve utilisation up to 80 per cent.

Analysts are of the opinion that the firm can expand margins by another 280 bps to 27.8 per cent over the next one year, as the company is on a repair path and has beaten market expectations for the third straight quarter. After the volatility of the past three years, it appears that the firm is returning to operational stability, even if internal issues continue to plague it.