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Infosys: A decent start to the year

Jul 11, 2014

India's second largest software firm Infosys has announced its first quarter results for the financial year 2014-2015 (1QFY15). The company has reported a 0.8% quarter-on-quarter (QoQ) decline in its sales and a 3.5% QoQ decline in its net profits. Here is our analysis of the results

Performance summary
  • In rupee terms the consolidated sales decreased by 0.8% QoQ during 1QFY15. However, in US dollar terms the revenues were up 2% QoQ. The appreciation of the rupee in the quarter impacted the reported topline performance.
  • Operating profits were down by 2.1% QoQ. This was due to the fall in sales and higher sales and marketing expenses on an absolute basis. Thus the operating margin which came in at 25.1% this quarter was slightly lower than the same reported in the last quarter of 25.5%.
  • The other income fell by 2.6% QoQ. The lower other income also contributed to the fall in profit before tax (PBT) by 2.2% QoQ.
  • The tax rate for the quarter was higher on a sequential basis at 28.6% compared to 27.6% in 4QFY14.
  • The net profit for the company came in at Rs 28.86 bn a decrease of 3.5% QoQ.
Consolidated financial summary
(Rs m) 4QFY14 1QFY15 Change
Sales 128,750 127,700 -0.8%
Expenditure 95,940 95,590 -0.4%
Operating profit (EBIT) 32,810 32,110 -2.1%
Operating profit margin (%) 25.5% 25.1%  
Other income 8,510 8,290 -2.6%
Profit before tax 41,320 40,400 -2.2%
Tax 11,400 11,540 1.2%
Profit after tax/(loss) 29,920 28,860 -3.5%
Net profit margin (%) 23.2% 22.6%  
No. of shares   574.2  
Diluted earnings per share (Rs)*   194.3  
P/E ratio (x)*   17.2  

What has driven performance in 1QFY15?
  • In terms of service offerings, the big growth in this quarter came from the Infrastructure Management business. IMS revenues grew 8.8% QoQ in Rupee terms and 13% QoQ in US Dollar terms. Most of the services delivered a muted performance. The Application Development and Maintenance (ADM) and BPO businesses reported a fall in revenues by 2% and 4.4% QoQ respectively.

  • Based on the industry verticals, growth was seen in the retail and telecom verticals. However, the Energy and Transportation verticals were under pressure in this quarter.

  • In terms of geographies, revenues from North America increased by 0.8% QoQ while revenues from Europe fell on a sequential basis by 3.6%.

    Revenue break-up
    Rs m 4QFY14 1QFY15 Change
    By service offerings
    Application development and maintenance 44,934 44,057 -2.0%
    Application development 19,956 20,177 1.1%
    Application maintenance 24,978 23,880 -4.4%
    Business Process Management 7,081 6,768 -4.4%
    Infrastructure Management Services 9,270 10,088 8.8%
    Product Engineering Services 4,378 4,342 -0.8%
    Testing Services 11,845 12,132 2.4%
    Others 2,833 2,937 3.7%
    Total IT services 80,340 80,323 0.0%
    Consulting, Package Implementation & Others 41,844 41,247 -1.4%
    Products, Platforms and Solutions 6,566 6,130 -6.6%
    Total revenues 128,750 127,700 -0.8%
    By industry vertical
    Insurance, Banking and Financial services 43,131 42,652 -1.1%
    Manufacturing 29,613 29,626 0.0%
    Retail & CPG 19,956 20,177 1.1%
    Telecom 11,073 11,110 0.3%
    Energy & Utilities 6,824 6,513 -4.6%
    Transportation & Logistics 2,189 1,916 -12.5%
    Lifesciences & Healthcare 8,498 8,301 -2.3%
    Others 7,468 7,407 -0.8%
    By geography
    North America 76,993 77,642 0.8%
    Europe 32,445 31,287 -3.6%
    India 3,348 3,065 -8.4%
    Rest of world 15,965 15,707 -1.6%

  • At the operational level, the company's margins fell 0.4% QoQ. This was largely due to the investments being made to build the sales and marketing teams around the world. The company also gave wage hikes in the quarter: 1-2% for offshore employees and 6-7% for onsite employees. Yet the continuous efforts at cost containment are having a positive effect on the margins. This will be further reflected in coming quarters.

  • At the net level, the bottomline declined by 3.5% QoQ. This was largely due to the muted operating performance, lower other income and a higher tax rate seen sequentially in the quarter.
What to expect?
At the current price of Rs 3,334 the stock trades at a price/earnings ratio of 17.2 times its trailing twelve months earnings.

The company had a good quarter on the sales front. Revenues in US dollar terms were up 2% QoQ. The company signed 5 large deals with a total contract value of US$ 700 m and added 61 clients in the quarter. The company has a strong deal pipeline and the upcoming July-September quarter has traditionally been the strongest one in the year.

In terms of sales and marketing efforts the company continues to make investments in this regard to boost the topline. Infosys will hire over 300 people this year to fill up positions for key accounts around the world.

Attrition continued to remain a worry. On a trailing twelve months basis, the attrition stood at 19.5% which is among the highest in the industry. However the management stated that they expected attrition to start trending down from the next one-to-two quarters.

The employee utillisation continued to improve. The utillisation excluding trainees stood at 80.1% for the quarter and this now stands at an all time high level for Infosys. The management has stated that their target is to get the utillisation to 82-85% levels. Infosys has the headroom to achieve this as the utillisation rate including trainees currently stands at 74.8% and the company has a strong deal pipeline which can absorb the trainees over the next several months.

Going forward, the focus will shift to the new CEO Dr. Vishal Sikka who will take over from S.D. Shibulal on 1st August 2014. The CEO will have a challenging task of getting the company back to an industry level growth rate. He will also have to control attrition and win the confidence of the company's employees. Interesting days lie ahead for the company. However, we are of the view that despite the challenges, Infosys has sound long term prospects.

In the April 2014 Stock Select report, we had recommended investors Buy the stock of Infosys. Considering the valuations and the steadily improving fundamentals, we maintain our 'Buy' 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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