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Infosys: New team makes a good start
Oct 10, 2014

India's second largest software firm Infosys has announced its second quarter results for the financial year 2014-2015 (2QFY15). The company has reported a 4.5% quarter-on-quarter (QoQ) growth in its sales and a 7.3% QoQ growth in its net profits. Here is our analysis of the results

Performance summary
  • In rupee terms the consolidated sales increased by 4.5% QoQ during 2QFY15. In US dollar terms the revenues were up 3.1% QoQ.
  • Operating profits were up by 8.5% QoQ. This was due to good control over direct costs (as a percentage of sales) in the quarter. Thus, the operating margin which came in at 26.1% this quarter was higher than the same reported in the last quarter of 25.1%.
  • The other income was higher by 5.8% QoQ. The good operating performance along with the higher other income contributed to the rise in the profit before tax (PBT) by 7.9% QoQ.
  • The net profit for the company came in at Rs 30.96 bn an increase of 7.3% QoQ.
  • The company has declared a 1:1 bonus issue as well as an interim dividend of Rs 30 per share.

Consolidated Financial Snapshot (IFRS)
(Rs m) 1QFY15 2QFY15 Change 1HFY14 1HFY15 Change
Sales 127,700 133,420 4.5% 242,320 261,120 7.8%
Expenditure 95,590 98,590 3.1% 187,310 194,180 3.7%
Operating profit (EBIT) 32,110 34,830 8.5% 55,010 66,940 21.7%
Operating profit margin (%) 25.1% 26.1%   22.7% 25.6%  
Other income 8,290 8,770 5.8% 10,870 17,060 56.9%
Profit before tax 40,400 43,600 7.9% 65,880 84,000 27.5%
Tax 11,540 12,640 9.5% 18,070 24,180 33.8%
Profit after tax/(loss) 28,860 30,960 7.3% 47,810 59,820 25.1%
Net profit margin (%) 22.6% 23.2%   19.7% 22.9%  
No. of shares         574.2  
Diluted earnings per share (Rs)*         206.3  
P/E ratio (x)*         18.8  
*On a trailing 12 months basis

What has driven performance in 2QFY15?
  • In terms of vertical, service lines and geographies, the company witnessed broad based growth in this quarter. Core IT services grew by 3.6% QoQ in dollar terms compared to the overall revenue growth of 3.1% QoQ. This was due to de-growth (in dollar terms) in the company's products division. However, the management stated that there would be a pick-up in the products division in the quarters ahead.

    Revenue break-up
    Rs m 1QFY15 2QFY15 Change
    By service offerings
    Application development and maintenance 44,057 46,697 6.0%
    Application development 20,177 21,481 6.5%
    Application maintenance 23,880 25,216 5.6%
    Business Process Management 6,768 6,804 0.5%
    Infrastructure Management Services 10,088 10,540 4.5%
    Product Engineering Services 4,342 4,536 4.5%
    Testing Services 12,132 12,541 3.4%
    Others 2,937 2,935 -0.1%
    Total IT services 80,323 84,055 4.6%
    Consulting, Package Implementation & Others 41,247 43,228 4.8%
    Products, Platforms and Solutions 6,130 6,137 0.1%
    Total revenues 127,700 133,420 4.5%
    By industry vertical
    Insurance, Banking and Financial services 42,652 43,762 2.6%
    Manufacturing 29,626 31,087 4.9%
    Retail & CPG 20,177 20,413 1.2%
    Telecom 11,110 11,874 6.9%
    Energy & Utilities 6,513 7,338 12.7%
    Transportation & Logistics 1,916 2,001 4.5%
    Lifesciences & Healthcare 8,301 8,806 6.1%
    Others 7,407 8,139 9.9%
    By geography
    North America 77,642 81,119 4.5%
    Europe 31,287 32,955 5.3%
    India 3,065 2,935 -4.2%
    Rest of world 15,707 16,411 4.5%

  • In terms of operating performance, the company put up an excellent performance. The employee utillisation (excluding trainees) as well as the offshore volumes (in IT services) both reached all time high levels of 82.3% and 71.3% respectively. In addition to this the employee attrition came in at the same level as that seen in 1QFY15 of 19.5% (on a TTM basis). This could be an indication that the attrition pressure faced by the company has peaked out.
What to expect?
The company has a new CEO Dr. Vishal Sikka. In the conference call, he articulated his vision for Infosys. The core strength for Infosys has always been its employees and this was re-iterated. The company will invest heavily in training programs to upgrade the skills of its employees. In the quarter, the company completed the process of promoting an unprecedented number of people (about 12,000). This helped to contain the attrition rate at the same level as the last quarter.

The company continued with the operational improvements which were put in place by N.R. Narayana Murthy. The utillisation and the onsite: offshore mix clearly reflected the same. Dr. Sikka stated that it was possible for a company like Infosys to grow at an annual rate of 15-18% with stable operating margins of 25-28%. However, this is not yet an internal target for the management.

The company witnessed broad based growth in the quarter in IT services. The deal pipeline also remains strong. However, the products division witnessed de-growth as many companies delayed implementation of Finacle, the company's core banking product. The management stated that they would continue to invest in the product and develop new ones.

The company will deploy its cash hoard for acquisitions. However, the new acquisitions will not be done for growth. Rather, the strategy will involve filling gaps in the areas that Infosys currently lags behind its peers. The management said more clarity regarding the same will be provided in the coming quarters.

The bonus issue will have to be approved by share holders via postal ballot. Thus, the record date for the same will only be decided only after gaining the shareholder's approval.

While the new leadership has made a good start, the company still has a long way to go in terms of growth. However, it is heartening to note that a strategy is now in place which can be developed over a period of time.

At the current price of Rs 3,889 the stock trades at 18.8 times its trailing twelve month (TTM) earnings. The fundamentals of Infosys continue to improve. While there reasons to be optimistic about the company's future prospects, the stock price does not provide for sufficient margin of safety at these levels. Thus, we change our view on the stock to Hold.

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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