The Q4FY14 results of Infosys were a mixed bag. Good Q4 margins and a reasonable strong FY15 guidance (despite the recent profit warning) were positives. On the other side, deteriorating client mining (chart 3) and high attrition (chart 2) remain matters of concern. We believe the Street has provided negligible probability for the company to achieve the top end of the guidance (9% growth), which requires nearly 3% CQGR (compound quarterly growth rate) in the next four quarters. This is a positive risk for the stock in the next
6-12 months. Further, the management has guided for 24%-24.5% Ebit (earnings before interest and taxes) margins for FY15. This is lower than previously expected by the Street (25.5%). However, it is not a major worry, in our view. Low attrition, better client mining and reduction in onsite costs should provide upside to this guidance. Admittedly, all the three levers will work as growth trajectory improves. Overall, the stock may remain range-bound in the next six months, but we believe even an in-line performance in H1 will lead to a stock re-rating and upgrade in FY16 estimates.
Q4FY14 results overview
Infosys reported a revenue decline of 0.4% q-o-q in constant currency, led by volume growth of 0.4% and blended pricing decline of 0.8% sequentially in the IT services division. The margin expanded by 50bps despite weak growth in the quarter. The net profit growth of 25% y-o-y was boosted further by higher forex gains. Cash and investments for the company increased $5 billion. The company has increased the dividend payout ratio to 40% from 30% earlier.
Operating metrics in the quarter were a mixed bag: The cost optimisation measures continue to yield results as gross margins improved by 90bps. Fixed price contracts and utilisation (including trainees) in the quarter improved marginally on a sequential basis. Client mining has been weaker than expected as revenue per client declined for the ninth consecutive quarter. The top client declined 3% sequentially in the past two quarters. Also, the number of $100m+ and $200m+ customers declined in the quarter. Attrition is at the highest level in more than 24 quarters. As the company’s focus on client mining improves in the near term, we expect improvement in growth recovery accompanied by better margins.
Macro remains positive: The company’s management alluded to an improved deal pipeline compared to the last quarter, but decision cycles continue to remain long. Infosys won four large