Infosys: Cautious optimism steals thunder of good Q2

It believes second half of the financial year will be weaker than the first, due to client issues

The all-round growth by Infosys in terms of revenues, margins, and earnings, was the highlight of its quarter ended September. Revenues grew 8.9 per cent quarter-on-quarter to Rs 15,635 crore, helped largely by realisations. Volumes grew 3.7 per cent. The revenue growth was impressive. It beat Bloomberg estimate of Rs 15,224 crore. Infosys' Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin expanded a healthy 163 basis points quarter-on-quarter to 27.8 per cent. This was driven by better employee utilisation, lower visa costs, and a weaker rupee. The company put half of its bench employees to work. This generated more revenues per employee (utilisation). The company intends to reduce the bench to zero, which should further support margins.

Infosys' net profit grew 12 per cent sequentially to Rs 3,398 crore, again beating the Bloomberg estimate of Rs 3,282 crore. Even after excluding foreign exchange (forex) gains of $8 million (Rs 53 crore) which boosted the other income, earnings growth beat expectations.

Constant-currency revenue growth of 6.9 per cent beat estimates of 3.5 to 4.6 per cent. (Constant currency eliminates the effects of exchange rate fluctuations and is used to calculate financial performance. Companies with major foreign operations often use constant currencies when calculating their performance.) Even after excluding the one-time revenue of $23 million (Rs 152 crore) due to early termination of project by a client, constant-currency revenue growth stood at 5.9 per cent, while pricing was up 2.4 per cent sequentially. Infosys believes that pricing pressure will continue for the information technology (IT) sector in the longer run. To offset the pressure, it is stepping up efforts to increase automation and innovation.

Then, why the two per cent fall in Infosys' stock, after results? The management remained confident of meeting its full-year constant-currency revenue forecast. But, it hinted that the second half would be weaker than the first (a seasonal thing for the IT sector). The management was cautious on any negative surprises.

Citing a healthy deal pipeline and improving deal win rates, Infosys remained confident of achieving sector-leading growth in FY17. For FY16, Infosys has kept full-year constant-currency revenue growth forecast unchanged at 10 to 12 per cent. But, the dollar revenue growth forecast has been lowered to 6.4 to 8.4 per cent from 7.2 to 9.2 per cent, mainly due to currency movements. This, along with indications of some client problems in the short term, has also weighed on sentiments.

Infosys' stock is trading at 16 times the FY17 estimated earnings versus 18 times for Tata Consultancy Services. While this discount has narrowed in the recent past, analysts believe consistent improvement in Infosys' financial performance is necessary to witness further reduction.