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This is an entirely free service. No payments are to be made.Infosys Ltd announced third second quarter results for the financial year 2012-2013 (3QFY13) today. The company reported a 5.7% quarter-on-quarter (QoQ) growth in its sales while QoQ net profit growth was flat. Here is our analysis of the results.
(Rs m) | 2QFY13 | 3QFY13 | Change |
Sales | 98,580 | 104,240 | 5.7% |
Expenditure | 72,610 | 77,470 | 6.7% |
Operating profit (EBIT) | 25,970 | 26,770 | 3.1% |
Operating profit margin (%) | 26.3% | 25.7% | -2.5% |
Other income | 7,060 | 5,030 | -28.8% |
Profit before tax | 33,030 | 31,800 | -3.7% |
Tax | 9,340 | 8,110 | -13.2% |
Profit after tax/(loss) | 23,690 | 23,690 | 0.0% |
Net profit margin (%) | 24.0% | 22.7% | |
No. of shares | 571.4 | ||
Diluted earnings per share (Rs)* | 163.5 | ||
P/E ratio (x)* | 16.4 |
Rs m | 2QFY13 | 3QFY13 | Change |
By service offerings | |||
Application development and maintenance | 37,855 | 37,318 | -1.4% |
Application development | 16,759 | 16,470 | -1.7% |
Application maintenance | 21,096 | 20,848 | -1.2% |
Business Process Management | 4,633 | 5,420 | 17.0% |
Infrastructure Management | 6,703 | 7,193 | 7.3% |
Product Engineering Services | 3,352 | 3,336 | -0.5% |
Testing Services | 8,478 | 8,756 | 3.3% |
Others | 2,563 | 2,502 | -2.4% |
Total IT services | 63,584 | 64,525 | 1.5% |
Consulting, Package Implementation & Others | 29,574 | 33,982 | 14.9% |
Products, Platforms and Solutions | 5,422 | 5,733 | 5.7% |
Total revenues | 98,580 | 104,240 | 5.7% |
By industry vertical | |||
Insurance, Banking and Financial services | 33,221 | 35,129 | 5.7% |
Manufacturing | 21,786 | 22,620 | 3.8% |
Retail | 16,759 | 16,678 | -0.5% |
Communication (Telecom) | 9,759 | 10,007 | 2.5% |
Energy (Utilities ) | 5,225 | 5,629 | 7.7% |
Transportation & Logistics | 1,676 | 1,876 | 12.0% |
Lifesciences & Healthcare | 5,225 | 6,567 | 25.7% |
Others | 4,929 | 5,733 | 16.3% |
By geography | |||
North America | 62,993 | 63,586 | 0.9% |
Europe | 21,589 | 25,018 | 15.9% |
India | 1,577 | 2,293 | 45.4% |
Rest of world | 12,421 | 13,343 | 7.4% |
The pricing growth was something that should be taken as a good sign. Accordingly, the management was confident in maintaining the USD revenue guidance for FY13 excluding Lodestone. Taking Lodestone into account, the USD revenue growth for the year was guided further up by 1.5%.
While the above paragraphs may indicate that all is fine, we are slightly concerned with the continued fall in operating margin since the last five quarters. The operating margin stood at 31.2% at the end of 3QFY12 but has declined to 25.7% at the end of 3QFY13. Further, there was also a sequential drop in gross margins, since the last three quarters. The gross margin of 37.01% seen during 3QFY13 fell short of the gross margins of 41.28% and 42.13% achieved at the end of FY12 and FY11 respectively.
What gave us relief from the margin pressure aspect was the gradual shaping up of Infosys 3.0 strategy. The benefit of the strategy is visible in the growth in the Consulting business (aided by Lodestone) and the growth of the Products and Platforms businesses. The total contracts booked in these segments increased from US$ 485 mln to US$ 603 mln. Further 20 unique products and platforms were launched and sold to 70 clients. Finacle alone saw a growth of around 9% during the quarter.
Management's confidence with regard to the stable pricing environment also adds to the comfort. If one compared the utilization figure at the end of December 2012 with that of December 2011, one would have seen a drop from 77.4% to 73.2%, which could prove to be a growth lever going forward, assuming utilization reverts towards the average of around 76%.
Deal wins have been very impressive. 8 large deals amounting to $730 mln were closed in 3QFY13.
A closer look at the balance sheet would reveal a large accumulation of cash and cash equivalents, which stood at Rs 224.36 bln at the end of 3QFY13. However, from a value perspective, that should add as a comfort to investors, because Infosys has always been a conservative company and it could be very fair to assume that they would not deploy cash in unrelated activities. Rather the management is expected to use it for value-accretive acquisition as has been observed with Lodestone.
Considering all the above aspects and our conservative projections including expected revenue from the Lodestone acquisition, we continue to maintain our Buy view on the stock from an FY15 perspective.
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