Infy reboots, beats Street

IT major sticks to revenue guidance and delivers 3.7% net profit growth

N R Narayana Murthy didn’t speak a word on Friday, nor was he seen on television screens through the day. But the Murthy impact was all-pervasive after Infosys — where he returned as executive chairman in June — surprised everybody with a sparkling set of numbers in the June quarter of this financial year, after many quarters of disappointment.

More important, Infosys expressed its intention of returning to aggressively chasing deals, even those with low margins, to regain market share. “We are definitely more aggressive in going after growth. We are definitely making progress in our efforts to win large IT (information technology) outsourcing deals (Infosys won seven large deals in the quarter),” Infosys     MD & CEO S D Shibulal said after announcing the results.

Investors cheered the strategy turnaround, sending Infosys’ share prices to its highest in six months. The stock closed 11 per cent higher at Rs 2,802.75, after touching an intra-day high of Rs 2,905, on the BSE.

Infosys also maintained its six-10 per cent revenue growth forecast for the current financial year, defying some expectations that it would cut its target if the business outlook remained poor. No one seemed bothered about the fact that Infosys’ revenue growth forecast still lags the 12-14 per cent outlook for the sector, made by the National Association of Software and Services Companies.

In the quarter ended June 30, the company reported 3.7 per cent growth in net profit, at Rs 2,374 crore, compared with the corresponding quarter last year, though it saw a sequential decline of 0.8 per cent. Revenue at Rs 11,267 crore was an increase of 17.2 per cent on a year-on-year basis. The company added 66 clients during the quarter, one of the best performances in recent years.

It posted 7.8 per cent quarter-on-quarter growth in revenues at Rs 11,267 crore, against an estimated five-to-six per cent. The dollar-term revenue growth, mostly expected to be flat sequentially, grew 2.7 per cent. The volume growth (in billed man-hours in a quarter) of 4.1 per cent, too, came as a pleasant surprise. The company maintained its operating margin at 23.5 per cent despite the salary revisions it made with effect from May.

“Clearly some parts of Infosys’ new strategy are working,” Bhuvnesh Singh of Barclays said in a note, adding the numbers could, however, remain volatile in the near term.

Shibulal seems to know that more than anybody else. That explains his statement: “The challenge is volatility in our performance. One quarter cannot be seen as a secular trend. Growth is our focus and we are enthused but it’s a journey.”

 

Where the Murthy factor was most pronounced is that Infosys is no longer going overboard in its commentary about the macroeconomic environment, delay in decision-making cycle, deal closures and clients’ ramp-down.

Ankita Somani, research analyst-IT & telecom, Angel Broking, said, “It clearly looks like Infosys is back to following the understating and over-performance route.”

To meet its guidance forecast of six-10 per cent growth, she said, the company needs just about 1.5 per cent growth over the next three quarters. If Infosys manages to deliver similar growth next quarter — given that Q2 is usually a strong quarter for the industry — its chances of bettering the guidance will be brighter.

Interestingly, the company said its renewed focus on the IT business (also called ADM or application, maintenance, development) has helped it to acquire some predictability. This is in line with what Murthy had told shareholders during the annual general meeting last month: he had committed to bring back focus on the “bread and butter” ADM business.

The company said its renewed focus on ADM helped it bag some large deals. In Q1 of FY14, it increased the number of $100-million clients to 15 from 12 in the previous quarter. The growth was primarily driven by North America, the largest geography for the company, which grew close to five per cent year on year. Vertical-wise, retail and life science, which accounted for close to 25 per cent of its overall revenue, grew 6.3 per cent on a sequential basis, followed by manufacturing at four per cent.

Other analysts said it would not be fair to attribute the stellar performance of Infosys to the Murthy magic but agreed the Murthy touch of understating and over-achieving is back. “It will not be fair to give the credit for the performance of the company to someone who has just returned. It is not fair towards the current team, which has worked really hard,” said Ian Marriott, vice-president, Gartner.

According to a note issued by CLSA, while Murthy’s entry will likely drive organisation-wide changes, much of the credit of this quarter’s performance goes to the earlier management team. “It remains to be seen what extent of changes are effected by Murthy. With this performance, Infosys’ FY14 dollar-term growth guidance of 6-10 per cent will most likely be beaten. However, given Infosys’ recent history of volatile performance, the quantum of beat looks uncertain,” it added.

Net profit	YoY growth	QoQ growth
Rs 2,374 crore	3.7%	-0.8%
Revenues	YoY growth	QoQ growth
Rs 11,267 crore	17.2%	7.8%
EPS	YoY growth	QoQ growth
Rs 41.54	-0.8%	3.7%

LOOKING UP

• Volume growth (growth in billed man-hours in a quarter) grew 4.1%
• Company maintained operating margin at 23.5% despite wage revision in May
• Maintains full-year revenue growth guidance of 6-10%