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Infosys: Bottom line disappoints - Views on News from Equitymaster

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Infosys: Bottom line disappoints
Jul 12, 2013

IT services major Infosys Ltd has announced its first quarter results for the financial year 2012-2013 (1QFY14). The company has reported a 7.8% quarter-on-quarter (QoQ) growth in its sales and a 0.8% QoQ fall in its net profits. Here is our analysis of the results.

Performance summary
  • Sales grew by 7.8% QoQ during 1QFY14.
  • Operating margins remained flat at 23.6% during the quarter as compared to 4QFY13.
  • Other Income declined by 14.4% QoQ during the quarter. The decline in other income combined with the flat operating margin led to a lower growth in the profit before tax (PBT). The PBT increased by 3.3% QoQ.
  • The effective tax rate increased from 23.7% at the end of 4QFY13 to 26.8% at the end of 1QFY14 because of which the net profit declined by 0.8% QoQ.
  • The company added 66 new clients (gross) during the quarter taking the total number of active clients to 836.

Consolidated Financial Snapshot (IFRS)
(Rs m) 4QFY13 1QFY14 Change
Sales 104,540 112,670 7.8%
Expenditure 79,920 86,030 7.6%
Operating profit (EBIT) 24,620 26,640 8.2%
Operating profit margin (%) 23.6% 23.6% 0.1%
Other income 6,740 5,770 -14.4%
Profit before tax 31,360 32,410 3.3%
Tax 7,420 8,670 16.8%
Profit after tax/(loss) 23,940 23,740 -0.8%
Net profit margin (%) 22.9% 21.1% -1.8%
No. of shares   574.2  
Diluted earnings per share (Rs)*   165.6  
P/E ratio (x)*   17.0  
*On a trailing 12 months basis

What has driven performance in 1QFY14?
  • In terms of service offerings, Consulting & Package implementation witnessed the highest growth at 10.7% QoQ. Application Development was the next to follow at 9.2% QoQ while Testing Services witnessed a 9.1% QoQ growth during the quarter. Product Engineering Services and Others, each witnessed a growth of 7.8% QoQ. Business Process Management saw a growth of 5.7% QoQ while Infrastructure Management and Application Maintenance saw a growth of 4.8% QoQ and 4.5% QoQ respectively. Products, Platforms and Solutions saw a growth of 2.1% QoQ. On an overall basis, IT services (64.5% of consolidated revenue) grew by 6.7% QoQ.

  • Based on the industries, Lifesciences and Healthcare grew by 14.2% QoQ followed by the Others vertical which grew by 11.7% QoQ. Retail grew by 10.6% QoQ while Manufacturing grew by 9.2% QoQ. Transportation and Logistics grew by 7.8% QoQ. Insurance, Banking and Financial Services grew by 7.1% QoQ. Energy witnessed the slowest growth at 1.6% QoQ while Telecom was the only segment which saw a negative growth of 1.5% QoQ.

  • In terms of geographies, India saw the highest growth at 16.8% QoQ while North America followed at 9.9% QoQ. Revenues from the Rest of the World saw a growth of 7.8% QoQ while Europe saw a very meager growth of 1.7% QoQ.

    Revenue break-up
    Rs m 4QFY13 1QFY14 Change
    By service offerings
    Application development and maintenance 37,007 39,435 6.6%
    Application development 16,204 17,689 9.2%
    Application maintenance 20,803 21,745 4.5%
    Business Process Management  5,436  5,746 5.7%
    Infrastructure Management  7,527  7,887 4.8%
    Product Engineering Services  3,345  3,605 7.8%
    Testing Services  8,677  9,464 9.1%
    Others  2,404  2,591 7.8%
    Total IT services 64,397 68,729 6.7%
    Consulting, Package Implementation & Others 34,185 37,857 10.7%
    Products, Platforms and Solutions  5,959  6,084 2.1%
    Total revenues   104,540   112,670 7.8%
    By industry vertical
    Insurance, Banking and Financial services 35,439 37,970 7.1%
    Manufacturing 23,208 25,351 9.2%
    Retail 16,099 17,802 10.6%
    Communication (Telecom)  9,722  9,577 -1.5%
    Energy (Utilities )  5,436  5,521 1.6%
    Transportation & Logistics  1,882  2,028 7.8%
    Lifesciences & Healthcare  7,004  8,000 14.2%
    Others  5,750  6,422 11.7%
    By geography 
    North America 62,933 69,179 9.9%
    Europe  26,135 26,590 1.7%
    India   2,509  2,929 16.8%
    Rest of world  12,963 13,971 7.8%

  • The company witnessed stability in terms of pricing in constant currency terms during the quarter. Onsite volume growth was 5.8% QoQ while offshore volume growth was 2.5% QoQ.

  • Employee utilization (excluding trainees) improved to 75.9% during the quarter as compared to 73.9% seen during the previous quarter (4QFY13). The net addition during the quarter slowed down substantially as compared to the last two quarters with the number being 575. The attrition rate increased marginally from 16.3% to 16.9%.

  • Operating margins remained flat at 23.6%.

  • The increase in effective tax rate from 23.7% to 26.8% had an adverse impact on the net profit, which declined by 0.8% QoQ. Net profit margin declined by 1.8% QoQ and stood at 21.1% at the end of 1QFY14.

What to expect?

At the current price of Rs 2,789.7, Infosys' stock is trading at a trailing twelve months (TTM) P/E of 17 times.

While the quarter's performance was average, the fact that there were no pricing pressures witnessed during the quarter was a sign of comfort. Further, high volume growth witnessed during the quarter was led by the consulting division. That again, added to our confidence that the Infosys 3.0 strategy is gradually taking shape.

Seven large deals were won during the quarter with the total cumulative value standing at US$600 m. It is expected that the realizations from these deals will happen over the next 3-4 years. The management indicated that the pipeline remains strong although they are witnessing pressures with regard to discretionary spending by clients. However, most of the large deals that were won were in the re-bid space and hence there was no compromise on pricing.

The management seemed apprehensive about the regulatory changes happening in USA with regard to immigration; however, they refrained from going into the details of how exactly it would affect them.

There is room for further utilization (ex-trainees) improvement and the management is planning to take the figure to 74%, which could be good driver for revenue enhancement.

The Lodestone acquisition is yielding positive results and the integration process is taking place smoothly. The wage hikes that were announced post Mr. Narayana Murthy's arrival would take full effect from 1st July, 2013. According to management, that would have an effect of 300 bps (3%) in the near term. However, rupee's continued depreciation may reduce the negative effect quite a bit.

We remain positive on Infosys from an FY16 perspective and maintain our 'Buy' view.

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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