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Infosys: A weak quarter - Views on News from Equitymaster
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Infosys: A weak quarter
Apr 24, 2015

India's second largest software firm Infosys has announced its fourth quarter and full year results for the financial year 2014-2015. The company has reported a 2.8% quarter-on-quarter (QoQ) fall in its sales and a 4.7% QoQ fall in the net profit. Here is our analysis of the results

Performance summary
  • In rupee terms the consolidated sales decreased by 2.8% QoQ during 4QFY15. In US dollar terms the revenues were down 2.6% QoQ. The appreciation of the US Dollar against major global currencies impacted the topline.
  • The growth in business volumes was 0.9% QoQ. Structural pricing pressures impacting the industry continue to commoditize the traditional IT services.
  • Operating profits were down by 6.5% QoQ. This was largely due to the fall in the topline and an increase of 20.2% QoQ in administrative expenses in the quarter. Thus, the operating margin which came in at 25.7% this quarter was lower than the same reported in the last quarter of 26.7%.
  • The other income was higher by 4.9% QoQ. Despite the sequential rise in other income, the poor operating performance led to the fall in the profit before tax (PBT) by 4.4% QoQ.
  • The net profit for the company came in at Rs 30.98 bn a decrease of 4.7% QoQ.
  • The company has announced a bonus issue of 1:1.
  • The company has announced a final dividend of Rs 29.5 per share (equivalent to Rs 14.75 post the 1:1 bonus issue).
  • The company has announced two acquisitions: Kallidus Inc. (d.b.a Skava) which specializes in retail mobile commerce for a consideration of US$ 120 m and an early stage minority investment in Airviz for a consideration of US$ 2 m.
  • The company has guided for 10-12% YoY topline growth in FY16 in constant currency terms.

Consolidated Financial Snapshot (IFRS)
(Rs m) 3QFY15 4QFY15 Change FY14 FY15 Change
Sales 137,960 134,110 -2.8% 501,330 533,190 6.4%
Expenditure 101,070 99,620 -1.4% 380,920 394,870 3.7%
Operating profit (EBIT) 36,890 34,490 -6.5% 120,410 138,320 14.9%
Operating profit margin (%) 26.7% 25.7%   24.0% 25.9%  
Other income 8,400 8,809 4.9% 26,690 34,269 28.4%
Profit before tax 45,290 43,299 -4.4% 147,100 172,589 17.3%
Tax 12,790 12,320 -3.7% 40,620 49,290 21.3%
Profit after tax/(loss) 32,500 30,979 -4.7% 106,480 123,299 15.8%
Net profit margin (%) 23.6% 23.1%   21.2% 23.1%  
No. of shares         1,148.5  
Diluted earnings per share (Rs)*         107.4  
P/E ratio (x)*         18.6  
* On a trailing 12-months basis

What has driven performance in 4QFY15?
  • In terms of verticals, service lines and geographies, the company's performance was quite dull in 4QFY15 to say the least. All traditional IT service divisions were under pressure. However, the process engineering and products business bucked the trend.

    Revenue break-up
    Rs m 3QFY15 4QFY15 Change
    By service offerings
    Application development and maintenance 47,458 45,597 -3.9%
    Application development 20,556 19,178 -6.7%
    Application maintenance 26,902 26,420 -1.8%
    Business Process Management 7,450 7,108 -4.6%
    Infrastructure Management Services 11,313 10,863 -4.0%
    Product Engineering Services 4,691 4,694 0.1%
    Testing Services 12,554 11,936 -4.9%
    Others 3,173 3,353 5.7%
    Total IT services 86,639 83,551 -3.6%
    Consulting, Package Implementation & Others 44,975 43,854 -2.5%
    Products, Platforms and Solutions 6,346 6,706 5.7%
    Total revenues 137,960 134,110 -2.8%
    By industry vertical
    Insurance, Banking and Financial services 45,665 45,061 -1.3%
    Manufacturing 32,283 31,918 -1.1%
    Retail & CPG 20,556 20,251 -1.5%
    Telecom 12,003 11,131 -7.3%
    Energy & Utilities 6,760 6,035 -10.7%
    Transportation & Logistics 2,069 2,146 3.7%
    Lifesciences & Healthcare 9,795 9,119 -6.9%
    Others 8,829 8,449 -4.3%
    By geography
    North America 84,983 84,221 -0.9%
    Europe 33,110 30,979 -6.4%
    India 3,449 3,353 -2.8%
    Rest of world 16,417 15,557 -5.2%

  • The operating performance to a hit in this quarter due the increased administrative costs associated with the Panaya acquisition. Organically, pricing pressure continues to negatively impact traditional IT services. However, the employee attrition (excluding subsidiaries) fell significantly on a sequential basis to 18.9% (on a TTM basis).

  • At the net level, FY15 has been a good year for Infosys. The bottomline improved by 15.8% YoY due to the various cost optimisation efforts currently underway in the firm. The management stated that these efforts will continue.
What to expect?

At the current price of Rs 1,996 the stock trades at 18.6 times its trailing twelve month (TTM) earnings.

The weakness in the quarter was largely to the pricing pressures on the traditional IT services segment as well as the recent strength of the US dollar. The management stated that 1QFY16 also may be soft due to factors such as wage hikes as well as seasonally higher visa costs.

However, the guidance is for 10-12% YoY constant currency revenue growth along with stable margins for FY16. This indicates that the management's confidence about the growth momentum returning soon. The source of the confidence lies primarily in the new synergies that the new acquisitions will provide.

The management stated a longer term goal of achieving US$ 20 bn in revenues by 2020 along with operating margins of 30% and revenue per employee of US$ 80,000. This is alongside the goal of achieving an industry leading growth rate by FY18. This would imply a significant realignment of internal processes for Infosys going forward. We will keep a close watch on the same.

The management also increased the dividend payout policy from 40% (max) of net profit to 50% (max) of net profit. This is the second time in less than three years that the dividend payout target has been increased.

While the near term pressures may continue for a quarter or two, we believe the long term fundamentals of the company are sound. Considering the near term pressures, as well as the valuations, we maintain our hold view on the stock.

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