Is the markets’ excitement about Infosys results warranted?

It doesn’t take much to get investors excited about information technology (IT) stocks these days. Infosys shares jumped by around 6% after it announced dollar revenue growth of 3.1% for the September quarter, slightly ahead of analyst expectations of about 2.7% growth.

Net profit of Rs.3,096 crore was about 4% higher than the Street estimates, thanks to better-than-expected margins.

While all this is good, it must also be noted that Infosys now trades at 18.6 times trailing earnings, thanks to the handsome rally in its shares in the past three months. Meanwhile, its revenue grew around 6.5% year-on-year last quarter, about half the rate at which some of its peers are growing.

This is not to take away from the fact that the results included many positives.

Profit margins increased by about 100 basis points (bps) sequentially, and only about 30% of this gain came from favourable currency movements. One bps is one hundredth of a percentage point.

Infosys improved upon its employee utilization significantly (to over 82% excluding trainees) and also its share of revenues from offshore sites.

The company’s net employee addition stood at over 4,000 employees, the highest in the last 10 quarters.

Of course, high utilization rates and a high level of employee attrition would have necessitated increased hiring. Still, it is heartening to note that the company has increased hiring, as this is generally seen as a lead indicator for demand growth.

While the company maintained its revenue growth guidance for the year at 7-9%, it must be noted that adverse cross-currency movements mean that growth expectations have actually been upped by about 100 basis points.

Even so, given the rate at which some of the company’s peers are growing, this is hardly anything to get excited about. There wasn’t anything exciting about the company’s dividend payout as well. While it may be early days for new chief executive officer Vishal Sikka to finalize plans on how to use the company’s cash hoard, it is an area which needs to be addressed soon.

All told, given that Infosys still has a lot of catching up to do, some caution might be warranted while valuing the company’s shares. Besides, while the September quarter results included many positives, it remains to be seen if the performance can be sustained.

Infosys Technologies Limited