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Infosys: Volumes & rupee drive gains
Oct 12, 2011

IT services major Infosys has announced its second quarter results for the financial year 2011-2012 (2QFY12). The company has reported an 8.2% QoQ growth in its sales and a 10.7% QoQ increase in its net profit. Here is our analysis of the results.

Performance summary
  • Sales grew by 8.2% QoQ during 2QFY12. For the half year ended September 2011 (1HFY12), sales grew by 18.6% YoY.
  • Operating margins increased by 2.1% QoQ to 28.2% during the quarter as compared to 26.1% recorded in the previous quarter (1QFY12). However for 1HFY12, margins declined by 2.1% YoY as compared to the same period last year.
  • Higher margins led to a 10.7% QoQ growth in net profits. Profits would have been higher if not for the decline in other income as well as higher income tax expense during the quarter. For 1HFY12, net income increased by 12.5% YoY.
  • The company added 45 new clients during the quarter taking the total number of active clients to 647.
  • Buoyed by the better results for the quarter, the management has revised its guidance for the full year ending March 2012 upwards. The management now expects sales to grow by 21.8% to 24% YoY and Earnings per Share (EPS) to grow by 19.7% to 21.6% YoY.

Financial performance snapshot
(Rs m) 1QFY12 2QFY12 Change 1HFY11 1HFY12 Change
Sales 74,850 80,990 8.2% 131,450 155,840 18.6%
Expenditure 55,330 58,180 5.2% 92,920 113,510 22.2%
Operating profit (EBDITA) 19,520 22,810 16.9% 38,530 42,330 9.9%
Operating profit margin (%) 26.1% 28.2%   29.3% 27.2%  
Other income 4,430 3,870 -12.6% 5,060 8,300 64.0%
Profit before tax 23,950 26,680 11.4% 43,590 50,630 16.2%
Tax 6,730 7,620 13.2% 11,340 14,350 26.5%
Profit after tax/(loss) 17,220 19,060 10.7% 32,250 36,280 12.5%
Net profit margin (%) 23.0% 23.5%   24.5% 23.3%  
No. of shares       574.1 574.2  
Diluted earnings per share (Rs)*         125.8  
P/E ratio (x)*         21.0  
*On a trailing 12 months basis; adjusted for exceptional items
Note: Depreciation figures have not been disclosed separately and hence these are included in operating
expenses to calculate EBDITA margins

What has driven performance in 2QFY12?
  • The growth in sales for the quarter was driven by the growth across all of the company's key segments with the exception of the product segment. The company's main business of 'application development and maintenance' (38.7% of total sales) witnessed a growth of 9% QoQ mainly on account of a 14.9% QoQ growth in application development. The other key segment of 'consulting & package implementation' (24.7% of total sales) clocked a growth of 6.1% QoQ during the quarter. The 'Product Engineering Services' segment recorded the best performance with a 15% QoQ growth in sales. However, the Product Revenues segment continued to see a decline and recorded a 5.3% QoQ decline in sales.

  • Based on the industries, there was a robust growth recorded in each of the industry verticals. The 'Lifesciences & healthcare' segment emerged the winner for the quarter with a 26.2% QoQ growth in sales. The main 'BFSI' (Insurance, Banking & Financial Services) segment recorded a healthy growth of 7.9% QoQ in sales during the quarter. Revenues from 'Energy', 'manufacturing' and 'communications' segments saw a growth of 8.2% QoQ, 7.7% QoQ and 6.2% QoQ respectively during the quarter.

  • As for the geographical performance, there was a growth of 10.1% QoQ in sales from North America. Sales from Europe grew by 4.1% QoQ during the quarter. However, revenues from India continued to fall and witnessed a decline of 8.4% QoQ during the quarter. Business from the rest of world grew by 9.1% QoQ.

    Revenue break-up
    Rs m 1QFY12 2QFY12 Change
    By service offerings
    Application development and maintenance 28,742 31,343 9.0%
    Application development 12,051 13,849 14.9%
    Application maintenance 16,692 17,494 4.8%
    Business Process Management 4,042 4,373 8.2%
    Consulting Services and Package Implementation 18,862 20,005 6.1%
    Infrastructure Management 4,416 4,697 6.4%
    Product Engineering Services 2,395 2,754 15.0%
    System Integration 4,716 4,859 3.1%
    Testing Services 5,614 6,641 18.3%
    Others 2,470 2,916 18.0%
    Total services 71,257 77,588 8.9%
    Product revenues 3,593 3,402 -5.3%
    Total revenues 74,850 80,990 8.2%
    By industry vertical
    Insurance, Banking and Financial services 26,497 28,589 7.9%
    Manufacturing 15,195 16,360 7.7%
    Retail 12,051 12,634 4.8%
    Communication (Telecom) 7,934 8,423 6.2%
    Energy (Utilities ) 4,266 4,616 8.2%
    Transportation & Logistics 1,347 1,377 2.2%
    Lifesciences & Healthcare 3,593 4,535 26.2%
    Others 3,967 4,454 12.3%
    By geography
    North America 48,054 52,886 10.1%
    Europe 15,943 16,603 4.1%
    India 1,946 1,782 -8.4%
    Rest of world 8,907 9,719 9.1%

  • On an overall basis, the growth in sales was mainly thanks to the 4.7% QoQ increase in onsite volumes and the 4.5% QoQ increase in offshore volumes. Billing rates for onsite business recorded a decline of 1.6% QoQ. However, billing rates for the offshore business recorded an increase of 3.1% QoQ during the quarter.

  • Employee utilization rates improved to 70.2% during the quarter as compared to 69.6% during the previous quarter (1QFY12). The company continued its hiring spree during the current quarter as well. Infosys has hired 8,262 employees (on a net basis) during the quarter. Attrition rates have come down marginally on a sequential basis and stood at 15.6% at the end of the current quarter, as compared to 15.8% at the end of the previous quarter (ended June 2011).

  • Operating margins improved to 28.2% during the quarter from the 26.1% seen during the previous quarter (1QFY12). This was on account of lower cost of sales. Operating margins were also aided by the movement in rupee exchange rate. The average realized rate stood at Rs 46.3 to a dollar as compared to Rs 44.8 during the previous quarter.

  • Net income during the quarter increased by 10.7% QoQ. This was on account of the improvement in operating margins which offset the negative impact of the decline in other income as well as the higher tax outflow during the quarter.

What to expect?
At the current price of Rs 2,648, the stock is trading at a multiple of 15.2 times our estimated FY14 earnings.

Infosys witnessed a good quarter with a robust growth across all its key segments. However, with regards to the future, the management reiterated the concerns of the uncertain demand environment. They highlighted that the clients are being cautious with regards to awarding large deals. This is leading to a delay in the start of large projects. However, they added the there are no budget cuts from the clients' side as of now. As a result, they expect a very strong deal pipeline, going forward.

During the quarter, the company won several large deals. With regards to revenue growth guidance, the management changed it marginally from earlier stated 18%-20% to 17.1%-19.1%. This decline in guidance was due to adverse currency movement. On the margins front, the management started the year with the guidance of 3% decline for the financial year 2011-12. However, they now expect the decline to be in range of 0.5% to 1%. The recent depreciation in the rupee is the main reason for this improved guidance.

The management maintained its guidance for hiring of 45,000 for the current financial year. Therefore, the employee utilization for the full year is expected to be 2% down from the previous year. The management expects it to be in the range of 78%-81%. They stated that the company is building capacity to seize the future growth opportunities in the sector.

The management stated that they are on the right track of next phase of the company's journey which is Infosys 3.0. Despite the near term concerns in the uncertain global economic environment, the company is well poised to do well in the future. We maintain our 'Buy' view on the stock of the company from a 2-3 year perspective.

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