Infosys back in the game

Analysts say if the company is able to sustain its growth trajectory, there would be a further re-rating

Change in leadership has worked wonderfully for Infosys, which has yet again posted a good quarterly performance. The company appears to have returned to its earlier trend of 'promising less and delivering more'. This is the first time in at least two years that Infosys has beaten the upper end of its full-year revenue growth guidance. After raising its FY16 constant currency revenue growth guidance to 12.8-13.2 per cent in January this year (industry body Nasscom’s was 12-14 per cent), Infosys has delivered a higher growth of 13.3 per cent in FY16. The outlook for FY17, too, is robust with Infosys guiding for an 11.5-13.5 per cent growth in constant currency revenue, above Nasscom's growth forecast of 10-11 per cent. The guidance, along with positive management commentary, indicates that Infosys is back to posting industry leading growth. Improved momentum in large deal wins and higher total contract value are the key reasons behind the strong revenue traction.

For the March 2016 quarter, Infosys registered 1.9 per cent constant currency revenue growth driven by a healthy 2.4 per cent sequential increase in volume. Lower realisations (down 0.9 per cent sequentially) pulled down revenue growth a bit, but it indicates Infosys is not losing out on incremental growth to protect its margins. Infosys' operating margin expanded 60 basis points sequentially to 25.5 per cent aided by a weaker rupee, higher employee utilisation and lower sub-contracting costs. Going forward as well, the company maintained its margin guidance of 24-26 per cent in the medium term. While the firm is progressing well on its automation plans, automation has to scale up meaningfully and is vital in achieving the operating margin guidance of 30 per cent by FY20, say analysts.

In rupee terms, Infosys' revenues grew 4.1 per cent sequentially to Rs 16,550 crore, a tad ahead of Bloomberg consensus estimate of Rs 16,482 crore. Net profit grew 3.8 per cent to Rs 3,597 crore, ahead of Bloomberg estimate of Rs 3,521 crore. The bottom line performance would have been better but for the lower other income and higher tax rate.

There were some minor blips though such as fall in revenues from the top 10 customers and weak performance of the insurance vertical. The management indicated there could be a minor cut back by some clients. However, Infosys remains confident about maintaining healthy traction with most of its key clients going forward. The weakness in insurance, too, is seasonal and the management is confident of it picking up.

Thanks to consistent improvement in its financial performance, the Infosys scrip has re-rated in recent months and reduced its valuation discount with Tata Consultancy Services (TCS) to just six per cent - Infosys trades at 17.4 times FY17 estimated earnings versus 18.5 times for TCS. In this backdrop, most analysts expect the Infosys stock to witness some uptick in Monday's trade.