ANALYSIS: Fallen bellwether Infosys rises like a phoenix

Infosys beats Street estimates with a 3.8% QoQ revenue growth in Q2, announces special dividend

The fallen bellwether is ready to fight back and reclaim its position going by the second quarter earnings report of Infosys. Even though the company's net profit has declined both sequentially and annually by 8.4% and 11.1%, respectively, to $383 million, the top line has grown at 3.8% sequentially and 11% annually to $2.06 billion. In dollar terms, the uptick in revenue is not reflected in the net profit because the company has increased expenditure in the sales engine and its other income is lower during the quarter.

Even though the currency has declined 11% in Q2, operating margins have declined by 1.7% to 21.9% in Q2 as most of the gains from currency have been reinvested in the business. Total operating expenses are up 22.5% sequentially and 31% annually to $278 million in Q2, which has also dragged down operating profit both annually and sequentially by 4.4% and 3.6% respectively. Operating margins have declined, says Dhananjay Sinha of Emkay Global, as the company has reinvested most of the gains into the business.

The market believes that the company will see a revision in its earnings estimate later in the year but for now the market has given a thumbs up to a sequential revenue growth of 3.8%. The company reported a volume growth of 3.1% and the remaining uptick in revenues is driven by pricing. Given the strong set of numbers the company has reported both in Q1 and Q2, the company has revised its revenue growth guidance to 9-10% from the earlier 6-10%. This implies that the company's revenues would decline by 0.8% in Q3 and Q4. The company expects the second half to be weak due to the holiday season shut-down, US shutdown and possibility of weak retail sales.

The most promising part of this quarter is the traction the company is seeing in the large deals segment, which has driven the topline growth. The company has also added five large deals which has largely contributed to the sales momentum, said SD Shibulal, CEO and Managing Director of Infosys. For the first time in 12 quarters, the company's share of revenues from its top 10 clients has risen to 24.5% in Q2 compared to 24% in Q1. The company along with its subsidiaries added has added 68 clients during the quarter and has added 2,964 employees during the quarter (gross addition of employees is at 12,168). This apart, the company has also decided to loosen purse strings and announced a special interim dividend of Rs 20/American Depository Share. Also, utilization levels are up to 73.7% in Q2 from 72.4% in Q1 (including trainees). Utilisation levels excluding trainees is up to 77.8% in Q2 from 75.9% in Q1.

The company is focusing on big data and cloud which has helped drive revenue flow in the current quarter. In the second quarter, the company won over 15 new projects with clients in these segments. The company claims it is a leader in cloud services with more than 4,500 cloud experts, 200 engagements and 35 partners. The company is now engaging with clients to create innovative solutions around the mobile device. In the second quarter Infosys has begun over 25 different engagements in various areas such as mobile strategy consulting, mobile field service, customer engagement, and enterprise productivity, among others.

INFOSYS OPERATING METRICS SHOW DRAMATIC IMPROVEMENT

Volumes

• Volumes(IT Services): 3.1% QoQ and 11.5% YoY.  
• Utilization without trainees: 78.7%, up 290bps QoQ. 
• Utilization with trainees : 72.4%, up 220bps QQ.

 
Growth By Verticals (all in constant currency)

• Financial Services: 3.9%QQ
• Manufacturing:  +6.6%QQ
• Retail:  +1.2%QQ  

Growth by Geographies (all in constant currency terms)

• US: +3.9%QQ
• Europe- +3.8%QQ
• ROW:+6% QoQ
• India:+10.4% QoQ

Growth by client metrics -- 10 clients growing at 5.9% QoQ ( highest in over 12 quarters)

• Top 1: +3.8%QQ
• Top 5: +4.5 %QQ
• Top 10 :5.9% QQ( highest growth in over 12 quarters)
• Non Top 10:+3.1% QQ