Infosys Q3 results: Volume growth provides stability to performance

The company delivered better than expected on volume growth front, which stood at 1.6% QoQ, and consequently aided the EBIT and PAT coming in higher than expected

The third quarter results of FY18 results for all IT companies will be driven by seasonality and hence will be muted as compared to the results posted in H1FY2018. We expect the top-tier companies to grow 0.9-2.5 per cent QoQ, during the quarter. Infosys was not expected to deliver any extraordinary results for the quarter, especially when the company had already downgraded its full-year guidance to 5.5-6.5 per cent yoy CC growth, which implies an ask rate of 0.4-1.6 per cent CC QoQ growth for H2FY2018.

For the quarter, we went with the expectations that the company will post one per cent sequential growth in US dollar revenues to $2,755 million. EBITDA margins were expected to show a downtick of about 7bps QoQ to 26.7 per cent, while EBIT was expected to have a downtick of 39 bps QoQ to end the period at 23.8 per cent, towards the lower end of the guided 23-25 per cent. Consequently, PAT was expected to be at Rs 35.9 billion, a dip of 3.7 per cent QoQ. 

For Q3FY2018, the company ended up delivering results just in line on the US dollar revenue front, while it delivered better than expected on the volume growth front, which came in at 1.6 per cent QoQ, and consequently aided the EBIT and PAT coming in higher than expected. On constant Currency (CC) terms, the company posted a 0.8 per cent QoQ. Volume growth during the quarter was 1.6 per cent QoQ. In terms of geography, the growth was more driven by the ex-USA. North America posted a 0.7 per cent CC growth, Europe posted a 4.7 per cent qoq CC growth, India posted a 5.9 per cent qoq CC growth and ROTW posted a 4.0 per cent qoq CC growth. In terms of industry, the growth was more driven by the RCL and ECS segments. FSI posted a 0.1 per cent qoq CC growth, MFG posted a decline of 0.1 per cent qoq CC growth, RCL posted a 1.2 per cent qoq CC growth and ECS posted a 2.5 per cent qoq CC growth.

On operating front, the EBITDA margins came in at 24.3 per cent 24.2 per cent expected with an uptick of 10 bps qoq, on the back of good volume growth and consequently better employee (excluding trainees) utilisation rate. The employee utilisation rate came in at 84.9 per cent versus 84.7 per cent in 2QFY2018. 

In terms of client addition, the company added seven clients overall. It added three in the $75 million-plus, one in $50 million and one in $100 million-plus. Overall, the client additions were strong across the board and the active clients during the quarter was 1,191. The Management guidance for the year has remained same at 5.5-6.5 per cent sales growth in constant currency (CC) terms, while EBIT margins are expected to come in at 23-25per cent.

Overall, the results are better than expected on the key operating matrix. While the stock has moved up over the last few quarters due to the efforts of Salil Parekh, who took over the reins of the company and also owing to progressive buyback. As far as the stock is concerned we believe that it discounts all the positives very well, especially the FY2019 earnings. Hence, we will revisit our numbers for FY2019, in Q4FY2018 when companies will have more clarity on the budgets. As of now,we maintain our neutral stance on the stock.

The author is VP Research, IT Angel Broking Pvt Ltd. Readers are advised to do their own due diligence before taking any investment calls based on the content of this article.