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Infosys: Topline back on track - Views on News from Equitymaster

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Infosys: Topline back on track
Jul 21, 2015

India's second largest software firm Infosys has announced its first quarter results for FY16. The company has reported a 7% QoQ growth in its sales and a 2.2% QoQ fall in the net profit. Here is our analysis of the results.

Performance summary
  • In rupee terms the consolidated sales increased by a stunning 7% QoQ during 1QFY16. In US dollar terms revenues were up 4.5% QoQ. This is the highest quarterly growth rate in the last 15 quarters (excluding revenues from recent acquisitions).
  • The growth in business volumes was an exceptional 5.4% QoQ highest in the last 19 quarters.
  • Operating profits were flat. The operating margin came in at 24%. This was lower than the same reported in the last quarter of 25.7%.
  • The other income was lower by 14% QoQ. The fall in other income and the flat operating performance led to the fall in the profit before tax (PBT) by 2.9% QoQ.
  • The net profit for the company came in at Rs 30.30 bn a decrease of 2.2% QoQ.
  • The company has maintained its revenue guidance 10-12% in constant currency terms. It has increased the revenue guidance in US dollar terms to 7.2-9.2%.

Consolidated Financial Snapshot (IFRS)
(Rs m) 4QFY15 1QFY16 Change
Sales 134,110 143,540 7.0%
Expenditure 99,620 109,070 9.5%
Operating profit (EBIT) 34,490 34,470 -0.1%
Operating profit margin (%) 25.7% 24.0%  
Other income 8,809 7,580 -14.0%
Profit before tax 43,299 42,050 -2.9%
Tax 12,320 11,750 -4.6%
Profit after tax/(loss) 30,979 30,300 -2.2%
Net profit margin (%) 23.1% 21.1%  
No. of shares   2,296.9  
Diluted earnings per share (Rs)*   54.3  
P/E ratio (x)*   20.5  
*On a trailing 12 months basis

What has driven performance in 1QFY16?
  • In terms of verticals, service lines and geographies, the company's performance was quite broad based in 1QFY16. The IMS service line and the healthcare vertical were the top performers.

    Revenue break-up
    Rs m 4QFY15 1QFY16 Change
    By service offerings
    Application development and maintenance 45,597 48,660 6.7%
    Application development 19,178 20,096 4.8%
    Application maintenance 26,420 28,564 8.1%
    Business Process Management 7,108 7,177 1.0%
    Infrastructure Management Services 10,863 11,914 9.7%
    Product Engineering Services 4,694 5,024 7.0%
    Testing Services 11,936 12,775 7.0%
    Others 3,353 3,876 15.6%
    Total IT services 83,551 89,425 7.0%
    Consulting, Package Implementation & Others 43,854 47,081 7.4%
    Products, Platforms and Solutions 6,706 7,033 4.9%
    Total revenues 134,110 143,540 7.0%
    By industry vertical
    Insurance, Banking and Financial services 45,061 47,512 5.4%
    Manufacturing 31,918 34,450 7.9%
    Retail & CPG 20,251 21,531 6.3%
    Telecom 11,131 12,057 8.3%
    Energy & Utilities 6,035 6,029 -0.1%
    Transportation & Logistics 2,146 2,153 0.3%
    Lifesciences & Healthcare 9,119 10,909 19.6%
    Others 8,449 9,043 7.0%
    By geography
    North America 84,221 90,717 7.7%
    Europe 30,979 32,153 3.8%
    India 3,353 3,158 -5.8%
    Rest of world 15,557 17,512 12.6%

  • The operating performance was flat sequentially due to the seasonal impact of wage hikes and visa costs. The company has given an average salary hike of 7.5% for offshore staff and 2.5% for onsite staff. The impact was offset by the depreciation of the rupee against the US dollar on a sequential basis as well as a 9.1% QoQ decrease in administrative costs. The management has stated that they are comfortable maintaining operating margins in the range of 24-26%.

  • At the net level, the muted operating performance as well as lower other income led to a 2.2% QoQ decline in the bottomline. The net margin came in at 21.1% in the quarter compared to 23.1% in 4QFY15.
What to expect?
At the current price of Rs 1,113 the stock trades at 20.5 times its trailing twelve month (TTM) earnings.

Infosys has made a good start to FY16. Volume growth was slightly above our expectations. This we believe is an early positive sign of the recent acquisitions bringing in more business for the company. The company signed 6 large deals in the quarter four in the US and two in Europe. CEO Vishal Sikka stated that the recent acquisition on Panaya had a significant role to play in these large deal wins. We believe Infosys is getting back on track in terms of matching industry level growth rates.

The management stated that deal momentum remains strong but the big opportunity now is being seen in existing contracts. As and when they come up for renewal, the management believes that they are in a position to offer a more compelling value proposition than before. In this regard, the company's new innovation platform has begun to witness early traction.

On the flip side, pricing pressure continues to negatively impact traditional IT services. Pricing in constant currency terms was down 0.8% QoQ in 1QFY16. As stated earlier as well, the company plans to counter this by focusing on automating several in house functions and improving employee productivity. Infosys has an ambitious target of achieving revenue per employee figure of US$ 80,000 by the year 2020. This figure for 1QFY16 stood at US$ 12,566. The utillisation rate in 1QFY16 improved sequentially to 80.2% (excluding trainees). The annualized employee attrition also continues to improve. It stood at 14.2% in 1QFY16.

The long term fundamental story of Infosys remains sound. In the June 2015 Stock Select report we had upgraded the stock to Buy from an FY18 perspective with a revised target price of Rs 1,420. However, the stock has responded very strongly to the positive 1QFY16 results. At these levels, we believe investors do not have the comfort of a sufficient margin of safety. Thus, we change our view on the stock to Hold.

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Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

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  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
  2. Equitymaster has financial interest in Infosys.
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