Infosys signs out of Q1 on stronger note

Margins, volumes spring a positive surprise but attrition at all-time high

Infosys, India’s second largest information technology (IT) services company, ended the first quarter of financial year 2014-15 with better-than-expected earnings and the management indicating that most of the company-specific issues may now be a thing of the past.

The Bangalore-based company, which missed Street estimates for several quarters earlier, cheered investors by throwing positive surprises on the margin and volume growth fronts in April-June. In the quarter, it posted 21.6 per cent year-on-year growth in net profit to Rs 2,886 crore, and 13.3 per cent year-on-year growth in revenues to Rs 12,770 crore aided by volume growth (growth in billed man hours). Though sequentially the revenue was down 0.8 per cent and net profit was down 3.5 per cent, the numbers were far lower than the anticipated drop.

The sequential fall in net profit is explained by higher visa costs, salary hikes and a payment of $8 million to Infosys Foundation to comply with the mandatory corporate social responsibility norms under the new Companies Act.

Infosys reported a better-than-expected operating profit margin of 25.1 per cent despite effecting 6-7 per cent wage hikes for offshore employees and one-two per cent for onshore ones. Margins, which were down by only 40 basis points, got support from cost-rationalisation measures, higher utilisation and a 126-basis point benefit due to the revaluation of assets as per the new Companies Act. Some of the increased expenses were mitigated by higher utilisation, which stood around 80 per cent during the quarter, an improvement of 210 basis points over the previous quarter.

“It is a solid performance. They will be pretty encouraged by where they are at the moment, considering that they have been through some difficult times in last couple of years. The positive numbers have put them on a strong footing, giving a good platform for the new CEO,” said Ian Marriott, vice-president at analyst firm Gartner.

Investors celebrated the company’s performance cautiously. Infosys’ stock price went up around four per cent in intra-day trading on the BSE and finally settled at Rs 3,325.80, a gain of one per cent, while aiding the sectoral index to gain over 1.4 per cent.

In dollar terms, Infosys posted revenue growth of two per cent at $2,133 million while net profit grew one per cent to $482 million quarter-on-quarter.

S D Shibulal, CEO and MD of Infosys, who will step down at the end of this month, said the company's deal pipeline looked robust and it signed 61 new clients during the last quarter — one of the highest in the recent past.

Five new contracts with a total value of $700 million were signed and its quarter-on-quarter volume growth stood at 2.9 per cent. However, the company said these were not enough to upgrade the revenue guidance for the full year, which stands between 7 per cent and 9 per cent in dollar terms. This is almost half of industry body Nasscom's growth outlook for the sector of 13-15 per cent.

“As we have said in the past, our guidance is a statement of fact and our current guidance is based on where we stand today,” Shibulal said. "I am handing over a stronger Infosys than what it was when I took over," he added.

Attrition remains a concern for the company. In the quarter, it saw an all-time high attrition rate of 19.5 per cent. Dubbing the trend worrisome, the company outlined a series of measures to contain it.