The country?s second-largest IT services company Infosys on Friday proved sceptics wrong by keeping its FY14 dollar revenue projection intact while beating Street expectations with a 3.7% increase in net profit for the quarter ended June. The earnings announcement, the first since NR Narayana Murthy?s return as executive chairman, was cheered by investors, sending Infosys shares up 10.92% on the BSE at close. The IT major attributed this vigour in performance to a renewed focus on large IT outsourcing contracts.
Many brokerages had expected the company to lower its FY14 dollar revenue guidance of 6-10% made at the start of the quarter and which was below the industry?s projection of 12-14%. The company?s scrip closed at R2802.75 on the BSE, after touching R2,905 in early trade.
In rupee terms, the guidance was revised upwards to 13-17%.
Infosys posted a net profit of R2,374 crore for the quarter, helped by growth in business volumes and the rupee depreciation which offset the impact of the decline in pricing over the previous quarter. In sequential terms, profit declined 0.8%. While pricing declined 0.7% from the previous quarter, volumes grew 4.1% for the April-June stretch, during which it added 66 clients. The operating margin during the quarter was flat at 23.6%. Infosys added 18 more clients yielding over $1 million in revenue.
Consolidated revenue grew 17.2% on a year-on-year basis to R11,267 crore while the growth in sequential terms was 7.8%.
?One quarter cannot be seen as a secular trend. We have done reasonably well, but we remain cautiously optimistic,? said SD Shibulal, CEO and managing
director. ?Despite facing an uncertain macro environment, changing regulatory regime and a volatile currency environment, we have done well in Q1,? he added.
The management said growth was broad-based during the quarter, led by higher growth in North America and greater business momentum in verticals like manufacturing, retail and consumer products. During April-June, North America contributed 61.4% to overall revenue compared with 60.2% in the previous quarter.
Commented Bhuvanesh Singh of Barclays Research: ?Clearly, some parts of Infosys? new strategy are working, although numbers could remain volatile in the near term.? In dollar terms, the company?s net profit grew 0.5% year-on-year to $418 million while it declined sequentially by 5.9%. Infosys posted 13.6% increase in revenue to $1,991 million against the year-ago period. The quarter-on-quarter (QoQ) growth was 2.7%.
Goldman Sachs said the company?s topline growth beating estimates was the surprise element. ?This implies a sequential run-rate of 1.5% q-o-q in FY14 to achieve the higher end of the guidance range,? it said. ?The dollar revenue growth was led by Americas with over 6.1% q-o-q but Europe was down 5.1% q-o-q, reversing the past three quarters? trend of Europe doing better than US.?
Rajiv Bansal, chief financial officer, said: ?We maintained our margins and continued making investments in the business. We have announced compensation increases for FY14 effective July, which will affect our margins in the future quarters.? Infosys has indicated a 300-basis points quarterly impact due to the wage hikes. The company had announced an average wage increase of 8% for employees based in India and 3% hike for employees in other geographies.
The management said Ashok Vemuri, member of the Infosys board and head of Americas, will also handle the global sales portfolio for an interim period following the exit of sales and marketing head Basab Pradhan earlier this week.
The company?s flat operating margins, after five consecutive quarters of margin decline was a sign of stability, said Ankita Somani, research analyst for IT and telecom at Angel Broking. She added the company may face a headwind of wage hikes in the coming quarter which will again impact operating margin negatively.
Geographically, the North America market showed a robust growth of 4.9% sequentially while the European region declined 3% sequentially. The India market grew at 10.4% sequentially. Infosys? financial services business grew by 1.9%, while the manufacturing business grew 4% and the retail and life sciences grew at a healthy rate of 6.3%. Energy, communications and services showed a decline of 1.6% for the quarter.
But worryingly for the company, attrition level went up to 16.9% from 16.3% sequentially, and was higher than last year?s level of 14.9%. ?We are expecting the attrition rate to come down marginally over the next 2-3 quarters,? said Shibulal. ?Typically, employees leave for higher studies in this quarter.? The company?s net addition of employees stood at 575 out of a gross addition of 10,138 employees for the quarter. The utilisation rate, however, has gone up to 74%, an increase of 290 basis points on a sequential basis.
?The better-than-expected revenue growth resulted in margins also coming in slightly ahead of expectations. We expect the company, under Murthy?s leadership, to take steps to further improve employee engagement and implement stricter performance measurement methods. An improvement in the productivity levels should yield higher profit growth over the next few quarters,? said Dipen Shah, head of private client group research, Kotak Securities.
Religare Institutional Research noted that the recovery in application, development and consulting revenues is encouraging and the company performed well on most operational metrics. ?Healthy Q1 performance increases the probability of Infosys achieving or beating the top end of the guidance,? it added.
