Infy fails to meet expectations

While revenues grow 4.3 per cent sequentially, net falls 5.3 per cent.

Infosys is caught in a trap of its own making. The company’s habit of outperforming its own guidance by a wide margin has spoiled the market. Even as the company is in the midst of a massive restructuring exercise, the market continues to have high expectations. The company disappointed the Street after it reported a 4.3 per cent sequential growth in revenues to $1,671 million (23 per cent y-o-y) and 5.3 per cent fall in net profit to Rs 1,720 crore (16 per cent y-o-y) in the first quarter of FY12. The stock closed 4 per cent lower.

First quarter numbers show profitability is under pressure for a variety of reasons. The company has lined investments to build capabilities to meet the demands of a new environment. Operating margins declined 300 bps quarter-on-quarter to 26.1 per cent, led by a combination of wage revision, onsite shift in revenues and price decline. The impact on margins has to be viewed against the backdrop of limited use of margin levers such as utilisation rates and pyramid expansion, which would help in the subsequent quarter. The company has had six large deal wins, of which three are worth $100 mn each. This shows there is no drop in demand. Top line growth has been led by the retail vertical, which grew 10.7 per cent sequentially.

Infosys has raised FY12 earnings per share guidance to Rs 128-130. This, according to analysts, builds margin decline of 250 basis points versus 300 bps earlier. Infosys has retained its revenue guidance for FY12 at the previous level at 18-20 per cent. However, what this means is that the company will have to clock a revenue growth of 5 per cent, which is at the higher band of its Q2 guidance, and maintain a runrate of 5.8-6 per cent in the third and fourth quarter.

Pankaj Kapoor, director equity research, IT services, Standard Chartered Securities, says there is no structural risk to the company, but pricing could have been a positive trigger for the stock. Sequential fall in pricing of 0.3 per cent for onsite and 1.6 per cent offshore in constant currency is a concern. Be it the low utilisation level (67.4 per cent) or drop in margins, most of this is due to the restructuring that’s still going on at the company. Local hiring and investments in consulting has also put pressure on profitability.