Sikka steers Infy back to high-growth trajectory

Re-rating likely as sequential $ revenue growth beats estimates

The steps taken by Infosys CEO Vishal Sikka over the past few months have clearly boosted the company’s performance in the June quarter. Sikka’s sharp focus on sales and delivery strategy, and the decision to oversee top 15 clients personally have helped mine existing client relationships better.

Revenues from top 10 clients have grown 5.9 per cent sequentially compared with the decline in the previous quarter. Infy’s revenue from its top client has grown by 10.5 per cent  sequentially. Revenue growth rates across verticals are fast catching up with some of its peers, which could lead to a re-rating of the stock even if earnings upgrades do not happen for FY16.

Infy’s dollar revenues grew 4.5 per cent quarter-on-quarter (q-o-q) to $2.25 billion in the June quarter, which was well ahead of the Street’s expectations and the best the company's done in the past 15 quarters. IT services volumes grew 5.4 per cent quarter on quarter, the highest in 19 quarters. While topline has grown ahead of the estimates, the company’s margins took a knock in the June quarter owing to wage hikes and higher visa costs.

Operating margin declined 170 basis points (bps) to 24 per cent, as gross margins dropped 260 pbs. Emkay Global says: “Infosys has surprised positively on growth, though missing expectations on margins. While earnings estimates will not see any meaningful changes, stronger revenue growth will drive both stock upsides and provide succour to the bulls on a higher price/earnings multiple.”

For the past few years, investors have penalised Infosys for focusing on profitability, which had a negative impact on its revenue growth. This trend seems to be reversing. Even though net profit declined 4.5 per cent sequentially in dollar terms and 2.1 per cent q-o-q in rupee terms, the stock rose 10 per cent in early trades. The Street is more focused on the robust revenue growth reported during the quarter. Even as the company has retained its constant currency guidance at 10-12 per cent for FY16, it has revised its dollar revenue guidance upwards to 7.2-9.2 per cent for the same period (excluding acquisitions).

Commentary seems to suggest the company is implementing its strategy of increasing revenues per employee from $52,000 to $80,000 over the next few years through automation. The process is already underway, with Infosys winning 15 deals for Panaya, which will implement projects using a combination of people plus software.