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Infosys: Business volumes picks up - Views on News from Equitymaster
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Infosys: Business volumes picks up
Jan 9, 2015

India's second largest software firm Infosys has announced its third quarter results for the financial year 2014-2015 (3QFY15). The company has reported a 3.4% quarter-on-quarter (QoQ) growth in its sales and a 5.0% QoQ growth in its net profits. Here is our analysis of the results

Performance summary
  • In rupee terms the consolidated sales increased by 3.4% QoQ during 3QFY15. In US dollar terms the revenues were up 0.8% QoQ. The depreciation of the rupee against the US dollar in the quarter supported the topline performance.
  • The growth in business volumes was 4.2% QoQ, the highest quarterly growth in the last 3 years. This is all the more commendable considering the fact that the December quarter is seasonally weak for Indian IT firms.
  • Operating profits were up by 5.9% QoQ. This was due to good control over selling, general and administrative (SG&A) expenses in the quarter. Thus, the operating margin which came in at 26.7% this quarter was higher than the same reported in the last quarter of 26.1%.
  • The other income was lower by 4.2% QoQ. Despite the sequential fall in other income, the good operating performance led to the rise in the profit before tax (PBT) by 3.9% QoQ.
  • The net profit for the company came in at Rs 32.5 bn an increase of 5% QoQ.

Consolidated Financial Snapshot (IFRS)
(Rs m) 2QFY15 3QFY15 Change 9MFY14 9MFY15 Change
Sales 133,420 137,960 3.4% 372,580 399,080 7.1%
Expenditure
98,590 101,070 2.5% 284,980 295,250 3.6%
Operating profit (EBIT)
34,830 36,890 5.9% 87,600 103,830 18.5%
Operating profit margin (%)
26.1% 26.7%   23.5% 26.0%  
Other income
8,770 8,400 -4.2% 18,180 25,460 40.0%
Profit before tax
43,600 45,290 3.9% 105,780 129,290 22.2%
Tax
12,640 12,790 1.2% 29,220 36,970 26.5%
Profit after tax/(loss)
30,960 32,500 5.0% 76,560 92,320 20.6%
Net profit margin (%)
23.2% 23.6%   20.5% 23.1%  
No. of shares
        1,148.5  
Diluted earnings per share (Rs)*
        106.4  
P/E ratio (x)*
        19.5  
*On a trailing 12 months basis

What has driven performance in 3QFY15?
  • In terms of vertical, service lines and geographies, the company witnessed broad based growth in this quarter. Core IT services grew by 3.1% QoQ. The consulting and products divisions grew by 4% QoQ and 3.4% QoQ respectively. While the retail and telecom industries continue to witness pressure due to sector specific issues; in the last quarter the energy sector witnessed delays in IT spend due to the change in the sector's fundamentals caused by the sharp fall in crude prices. However, the management expects stability to return to the sector soon.

    Revenue break-up
    Rs m 2QFY15 3QFY15 Change
    By service offerings
    Application development and maintenance 46,697 47,458 1.6%
    Application development 21,481 20,556 -4.3%
    Application maintenance 25,216 26,902 6.7%
    Business Process Management 6,804 7,450 9.5%
    Infrastructure Management Services 10,540 11,313 7.3%
    Product Engineering Services 4,536 4,691 3.4%
    Testing Services 12,541 12,554 0.1%
    Others 2,935 3,173 8.1%
    Total IT services 84,055 86,639 3.1%
    Consulting, Package Implementation Others 43,228 44,975 4.0%
    Products, Platforms and Solutions 6,137 6,346 3.4%
    Total revenues 133,420 137,960 3.4%
    By industry vertical
    Insurance, Banking and Financial services 43,762 45,665 4.3%
    Manufacturing 31,087 32,283 3.8%
    Retail CPG 20,413 20,556 0.7%
    Telecom 11,874 12,003 1.1%
    Energy Utilities 7,338 6,760 -7.9%
    Transportation Logistics 2,001 2,069 3.4%
    Lifesciences Healthcare 8,806 9,795 11.2%
    Others 8,139 8,829 8.5%
    By geography 
    North America 81,119 84,983 4.8%
    Europe  32,955 33,110 0.5%
    India  2,935 3,449 17.5%
    Rest of world  16,411 16,417 0.0%

  • The operating performance of the company continues to improve. The employee utillisation (excluding trainees) at 82.7% was the highest in the last eleven years. However, the employee attrition (excluding subsidiaries) came in at 20.4% (on a TTM basis) compared to 20.1% seen in 2QFY15.
What to expect?
CEO Dr. Vishal Sikka has outlined his vision for Infosys. The company will aim for a long term growth rate of 15-18% (in US dollar terms) while maintaining margins at current levels. The senior management team to achieve this aspirational growth target is now in place. The company has already trained over 4,000 employees including senior staff and the sales force in the focus areas that will enable this growth.

The company's operational performance continues to improve on the back of better employee utillisation. This was clearly evident in the 4.2% QoQ growth in volumes (man-hours) in the quarter. The management stated that it was possible for the company to improve utillisation further in the coming quarters.

Infosys won three large deals (> US$ 50 m) in the quarter, the combined contract value of which is over US$ 200 m. The company's deal pipeline remains strong. However, the company is witnessing delays in decision making from clients in the retail, telecom and energy verticals.

The management did not provide any details about possible acquisitions. However, they have significantly increased the contribution to the company's innovation fund from US$ 100 m to US$ 500 m. This fund is available to make acquisitions around the world and to create an eco-system of strategic partners.

The company completed its 1:1 bonus issue in the quarter. Thus, the share capital has increased proportionately. To adjust for the same, we have restated the target price for the stock to Rs 2,368 from a FY17 perspective. This by no means changes the fundamentals of the business in any way.

At the current price of Rs 2,073 the stock trades at 19.5 times its trailing twelve month (TTM) earnings. The fundamentals of Infosys continue to improve. However, keeping in mind the valuations, we maintain our Hold view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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