Infosys Q2 profit tops estimates

Company maintains the annual sales growth outlook

N R Narayana Murthy, co-founder and former chairman of Infosys, has decided to step down from all positions at the information technology (IT) company, but some measures he had initiated seem paying off. The Bangalore-based company on Friday posted all-round growth beating the estimates on many counts.

On joining Infosys in his second innings in 2013, Murthy had initiated a three-pronged strategy: Cost-rationalisation (which he said would start yielding results in six-18 months), sales effectiveness (which would take nine-21 months to show results) and delivery effectiveness (benefits from which would be visible in 18-24 months). Starting October 10, Murthy will no longer be the non-executive chairman.

In the quarter ended September 30, the net profit grew 28.6 per cent year-on-year to Rs 3,096 crore. The revenue rose 2.9 per cent to Rs 13,342 crore. The net profit rose 7.3 per cent quarter-on-quarter and the revenue increased 4.5 per cent.

In dollar terms, Infosys' net profit increased six per cent sequentially while the revenue grew 3.1 per cent, slightly ahead of estimates. Most analysts had expected the company's dollar revenue to grow three per cent in the second quarter. Infosys left its revenue growth forecast for 2014-15 unchanged at seven-nine per cent.

Infosys also cheered investors by announcing a one-for-one bonus issue of shares, which analysts said was new chief executive Vishal Sikka's gift to the Street. This was Infosys' first quarterly earnings announcement after he took charge in August.

A recent rise in demand aided Infosys but measures to optimise costs and improve productivity led to better performance.

"This quarter's performance had all to do with Murthy and his initiatives," said a Mumbai-based analyst who did not wish to be named. "Nobody doubts Sikka's capabilities, but his endeavours will start reflecting two or three quarters from now. The Sikka effect will be evident only from 2015-16."

Reacting to the strong performance and bonus issue, Infosys' shares surged 7.2 per cent on the BSE before closing at Rs 3,889, up seven per cent over the previous close.

"On several fronts, our efforts to bring in operational efficiencies yielded encouraging results during the quarter," Chief Operating Officer U B Pravin Rao said. "We have seen the positive results of some of our interventions in sales, margins and attrition, and we will continue to focus on these areas."

Earnings during the quarter were aided by the other income of Rs 877 crore that came mainly from foreign-exchange gains and interest. In the corresponding quarter last year, Infosys had posted a foreign-exchange loss.

For a second quarter Infosys threw up a surprise on the margin front by posting one percentage point improvement at 26.1 per cent. Most analysts had expected 0.3-0.5 percentage point margin expansion.

Chief Financial Officer Rajiv Bansal said the margin improvement was mainly due to cost optimisation and there was still room for improvement. "We have been able to improve our margins and feel confident of sustaining these within a narrow band," said Bansal. "This is giving us increased confidence to make the investments required to meet our growth aspirations."

Infosys' employee attrition rate rose to a record high of 20.1 per cent in the quarter from 19.5 per cent in the previous quarter. Most analysts had anticipated this, and believe that the attrition will start tapering by January-March 2015. Infosys added 4,127 employees net during the quarter, higher than 879 in the previous quarter.

Employee utilisation, including trainees, improved marginally to 75.2 per cent from 74.8 per cent in the previous quarter.

"The improvement in employee utilisation and efficiency on the operating front remain positive," said Daljeet S Kohli, head of research at IndiaNivesh Securities. "Given the stable global environment and positive commentary from the management, we are of the view that Infosys' 2014-15 forecast is conservative. We expect an upward revision."

Infosys clocked 3.2 per cent sequential growth in North America and 4.2 per cent in Europe. The India business witnessed a decline of 5.1 per cent. Infosys, with its subsidiaries, added 49 clients during the quarter.

In terms of industry segments, energy, utilities, communication and services grew the strongest at 7.8 per cent followed by manufacturing at 3.6 per cent. Financial services and insurance, which account for a third of Infosys's overall revenue, grew 1.2 per cent sequentially.

Infosys also said it had pledged Rs 254 crore in 2014-15 towards corporate social responsibility through its philanthropic arm Infosys Foundation. The foundation is engaged in several programmes aimed at easing hunger, promoting education, improving health, assisting rural development, supporting arts and helping the poor.

HIGHLIGHTS
Infosys second-quarter earnings

• 7.3% up net profit QoQ; 28.6% up YoY
   
• 4.5% up revenue QoQ; 2.9% up YoY
   
• 1:1 bonus share issue
   
• 7-9% Revenue growth forecast for FY15 retained at #
   
• 26.1% Operating profit margin, up 100 basis points (bps)
   
• 20.1% Attrition, record high
   
• 75.2% Employee use, including trainees, up 70 bps

#Forecast in dollar terms; others in rupee terms