 "Infosys")
A better than expected set of numbers failed to excite the market as Infosys lowered its guidance for the year at 6.4-8.4 per cent. There are however, other stress points and surprises in the results too which signals tough days ahead both for the company and the stock.
We look at five key highlights of the results.
1) Infosys for the quarter ended September 2015 reported a six per cent revenue growth on a constant currency basis that was supported by a 3.7 per cent volume growth. The company has maintained its momentum of sequential growth which was negative in the fourth quarter of previous year but posted a 4.5 per cent in June quarter. A whopping $800 million currency gain helped the company beat market expectations. Revenue would have been higher by $23 million but for the termination of the contract by one of its clients due to a merger.
2) What has caught the market on the wrong foot is the attrition rate which had shown a sharp decline in June quarter but has again risen to 19.9 per cent on a consolidated basis. For June quarter, Infosys had reported attrition rates of 19.2 per cent as compared to 22.3 per cent in the previous year. Rajiv Bansal, the company’s CFO quitting the company has revived memories of senior level personnel leaving the company.
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3) The issuance of ESOPs, though a good measure to hold back employees has not gone well with the market. A dilution in equity capital of two per cent is perceived to be big given the growth in bottom line of around 10 per cent. This is expected to keep the stock subdued as free float in the stock increases.
4) The company has to be credited with its policy of keeping costs under check. Earnings before interest and tax (EBIT) has increased 15.8 per cent on a Q-o-Q basis to Rs 3,993 crore, an improvement of 153 basis points to 25.53 per cent, despite higher variable outgo to employees. Higher utilisation rate of 81.3 per cent as compared to 80.2 per cent in the previous quarter and better hedging policy has helped in maintaining higher margins.
5) The biggest dampener is the downward revision of growth numbers to a range of 6.4-8.4 per cent. The company said that they would meet the constant currency guidance of 10-12 per cent, indicating that the company may feel exchange rate pressure in the second half. The company management has said that traditionally second half is tough for IT companies and that they see headwinds in certain clients. While it is a known fact that second half is generally the slower half of most of the IT companies, Infosys reducing their guidance suggests that the company could not grow at the desired level in the first half. The company has also said that they see pricing challenges on large commoditised deals.
Though Infosys beat analysts expectations for the quarter, a lower guidance at a time when the company is growing at below industry average will take sometime to digest. Further, increased liquidity in the stock will keep buyers away for sometime. However, Infosys’ stock performance in the near future will also depend on how its peers perform.
