Infosys: Disappoints on profit front - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Infosys: Disappoints on profit front

Jul 12, 2011

IT services major Infosys has announced its 1QFY12 results. The company has reported a 3.2% QoQ growth in its sales but a decline of 5.3% QoQ in its net profit. Here is our analysis of the results.

Performance summary
  • Sales grew by 3.2% QoQ during 1QFY12.
  • Operating margins witnessed a decline of 2.9% QoQ to 26.1% during the quarter as compared to 29% recorded in the previous quarter. This was on account of higher cost of sales (as a percentage of sales).
  • Decline in operating margins offset the positive impact of higher other income as well as lower tax outflow. As a result, net profits declined by 5.3% QoQ.
  • The company added 26 new clients during the quarter taking the total number of active clients to 628.
  • The management has tweaked its guidance for the full year ending March 2012 slightly. The management now expects sales to grow by 15.5%-17.5% YoY and EPS to grow by 7.3%-8.9% YoY. The EPS guidance is slightly higher than the 5.5%-7.3% range guided at the beginning of the current fiscal year.

Financial performance snapshot
(Rs m) 4QFY11 1QFY12 Change
Sales 72,500 74,850
Expenditure 51,480 55,330
Operating profit (EBDITA) 21,020 19,520
Operating profit margin (%)
Other income 4,150 4,430
Profit before tax 25,170 23,950
Tax 6,990 6,730
Profit after tax/(loss) 18,180 17,220
Net profit margin (%)
No. of shares 574.2 574.2  
Diluted earnings per share (Rs)*   123.5  
P/E ratio (x)*   22.6  
Note: Depreciation figures have not been disclosed separately and hence these are included in operating
expenses to calculate EBDITA margins
*On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 1QFY12?
  • The 3.2% QoQ growth in Infosys’ 1QFY12 sales were aided by a decent performance of its key segment. The company’s main business of ‘application development and maintenance’ (38.4% of total sales) witnessed a growth of 4.3% QoQ mainly on account of a 4.6% QoQ growth in application maintenance. The other key segment of ‘consulting & package implementation’ (25.2% of total sales) witnessed a decent performance and clocked a 2.4% QoQ growth during the quarter. The ‘Product Engineering Services’ segment recorded the best performance with a 37.7% QoQ growth in sales. However, the Product Revenues segment, Business Process Management and Infrastructure management segments saw a decline of 8.2% QoQ, 0.4% QoQ and 0.1% QoQ respectively.

  • Based on the industries, Infosys saw the best performance from the retail space which grew by 14.6% QoQ. The main ‘BFSI’ (Insurance, Banking & Financial Services) segment recorded a growth of 2.4% QoQ in sales during the quarter. Revenues from ‘Lifesciences & healthcare’, ‘manufacturing’ and ‘energy’ saw a growth of 3.2% QoQ, 2.7% QoQ and 1.5% QoQ respectively during the quarter. However, ‘Transportation & Logistics’ and Communications segments witnessed a decline of 11.5% QoQ and 8% QoQ respectively.

  • As for the geographical performance, there was a growth of 4.1% QoQ in sales from North America. Sales from Europe and India witnessed a decline of 0.5% QoQ and 0.6% QoQ respectively during the quarter. Business from the rest of world grew by 6.8% QoQ.

  • On an overall basis, the growth in sales was mainly thanks to the 6.8% QoQ increase in onsite volumes and the 2.7% QoQ increase in offshore volumes. Billing rates for onsite business recorded a lackluster growth of 0.8% QoQ. However, billing rates for the offshore business recorded a marginal decline of 0.5% QoQ during the quarter.
    Employee utilization rates improved to 69.6% during the quarter as compared to 68.4% during the previous quarter (4QFY11). The company continued its hiring spree during the current quarter as well. Infosys has hired 2,740 employees (on a net basis) during the quarter. Attrition rates have come down on a sequential basis and stood at 15.8% at the end of the current quarter, as compared to 17.0% at the end of the previous quarter (ended March 2011).
Revenue break-up
Revenue break-up      
Rs m 4QFY11 1QFY12 Change
By service offerings      
Application development and maintenance 27,550 28,742 4.3%
Application development 11,600 12,051 3.9%
Application maintenance 15,950 16,692 4.6%
Business Process Management 4,060 4,042 -0.4%
Consulting Services and Package Implementation 18,415 18,862 2.4%
Infrastructure Management 4,423 4,416 -0.1%
Product Engineering Services 1,740 2,395 37.7%
System Integration 4,423 4,716 6.6%
Testing Services 5,293 5,614 6.1%
Others 2,683 2,470 -7.9%
Total services 68,585 71,257 3.9%
Product revenues 3,915 3,593 -8.2%
Total revenues 72,500 74,850 3.2%
By industry vertical      
Insurance, Banking and Financial services 25,883 26,497 2.4%
Manufacturing 14,790 15,195 2.7%
Retail 10,513 12,051 14.6%
Communication (Telecom) 8,628 7,934 -8.0%
Energy (Utilities ) 4,205 4,266 1.5%
Transportation & Logistics 1,523 1,347 -11.5%
Lifesciences & Healthcare 3,480 3,593 3.2%
Others 3,480 3,967 14.0%
By geography      
North America 46,183 48,054 4.1%
Europe 16,023 15,943 -0.5%
India 1,958 1,946 -0.6%
Rest of world 8,338 8,907 6.8%
  • Net income during the quarter declined by 5.3% QoQ. This was on account of the decline in operating margins which offset the positive impact of the 6.7% QoQ growth in other income. The decline would have been worse if not for the lower tax outflow during the quarter.
What to expect?

At the current price of Rs 2,790, the stock is trading at a multiple of 14.2 times our estimated FY14 earnings. The management maintains a cautiously positive outlook for the company despite the overall slowdown in the global economic scenario. Particularly with reference to Europe, the management stated that the macro factors remain gloomy. However, with respect to each of the business lines, the management does not see a major impact. This is visible in the healthy pipeline that the company has with respect to Europe. With respect to discretionary spending, the management stated that it is seeing an uptick in the same particularly for the retail, auto, energy and BFSI segments

With respect to margins, the management stated that the margins in the current quarter were negatively impacted by the wage increase. The company has increased wages by 6-8% for the onsite staff and by 2-3% for the offshore staff. For the full year 2012, the management expects margins to decline due to the impact of higher wages as well as due to lower utilization rates and currency movements. The company currently has a utilization rate lower than its normal rates. This is due to the fact that the company has strategically increased its employee base to take advantage of a reversal in the global trends.

Going forward, growth would largely be led by the volumes, while pricing is expected to remain stable at current levels. We maintain our buy view on the company from a 2-3 years perspective. (Research Pro subscribers please click here)

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 22, 2021 10:36 AM


  • Track your investment in INFOSYS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks