Infy logs out of FY15 with disappointing quarter

Infosys's performance in the quarter ended March this year has proven there is no short-cut solution to the company's problems and the initiatives taken under Managing Director and Chief Executive Officer Vishal Sikka might take more time to yield results.

During the quarter, Infosys failed to impress on almost all counts - revenue and net profit, as well as operating parameters such as operating margin, business volume and the performance of key verticals. The FY16 dollar-term growth estimate of 6.2-8.2 per cent was lower than expected and much lower than the average industry growth of 12-14 per cent expected by industry body Nasscom.

For the March 2015 quarter, Infosys reported a net profit of Rs 3,097 crore, an increase of 3.5 per cent over the corresponding period last year, while revenue rose 4.2 per cent year-on-year to Rs 13,411 crore. Sequentially, the net profit declined 4.7 per cent, while revenue fell 2.8 per cent.

The lacklustre performance failed to impress investors, despite the company announcing a 1:1 bonus issue of equity shares and the acquisition of US-based mobile-commerce solutions company Kallidus Inc for $120 million. Additionally, the company also raised the dividend payout ratio to 50 per cent from the current 40 per cent, which analysts say is a positive move from a capital allocation perspective. The payout ratio indicates the proportion of annual profits a company pays shareholders in the form of dividends. At the close of trade on Friday, the Infosys stock lost close to six per cent at Rs 1,996.25 on the BSE, against the sectoral index's loss of 2.78 per cent.

Operationally, the company reported one of its weakest volume growth (growth in billed man-hours during a quarter) in recent quarters at 0.9 per cent, owing to a 290-basis point decline in the employee utilisation rate (including trainees) at 72.8 per cent. The operating margin declined by 102 basis points to 25.7 per cent.

In dollar terms, the company's net profit stood at $498 million for the March quarter, a 2.3 per cent rise on a year-on-year basis; sequentially, it fell 4.6 per cent. At $2.16 billion, revenue grew 3.2 per cent compared to the year-ago period but fell 2.6 per cent quarter-on-quarter. Both the revenue and net profit reported by Infosys were well short of consensus analyst estimates. On an average, analysts had expected Infosys's net profit and revenue for the March quarter at $509 million and $2.23 billion, respectively, according to Bloomberg.

For FY15, Infosys's net profit grew 15.8 per cent to Rs 12,329 crore, while revenue rose 6.4 per cent to Rs 53,319 crore. In dollar terms, net profit stood at $2,013 million, up 15 per cent, while revenue rose 5.6 per cent to $8,711 million, missing the company's estimate. The Bengaluru-based company had pegged revenue growth for FY15 at seven-nine per cent.

"There is a structural change happening at the company," Sikka said at a post-earnings press conference. He, however, added despite the fact that the March quarter was a challenging one, he was seeing early successes for the company's 'renew-new' strategy. "Our focused employee engagement initiatives through the past few months have resulted in containing employee attrition to one of the lowest in recent times and our investments in innovation and in renewing our capabilities are helping elevate our client relationships," he added.

Sanjoy Sen, doctoral researcher, Aston Business School, UK, said, "Infosys's performance provides reconfirmation that their new strategic initiatives, aligned to structural changes, are starting to yield results. However, forecasts clearly had an element of over-optimism on how quickly these new initiatives could translate to the top line and bottom line. As a result, these forecasts have been missed."

For FY16, the company has given a revenue growth estimate of 6.2 per cent to 8.2 per cent in dollar terms and 10-12 per cent in constant currency terms. The latter indicates the growth in business without taking into consideration currency movements. The constant-currency revenue growth estimate is positive, as it is higher than the 7.1 per cent constant-currency growth in FY15.

Analysts, while saying the estimate is below expectations, are also sounding cautious. "Infosys's FY16 growth guidance of 6.2-8.2 per cent (constant currency terms 10-12 per cent), a tad weaker than our expectations. For the company to achieve eight per cent growth in FY16 (on a reported basis), the company will have to grow at a CQGR (compound quarterly growth rate) of 3.5 per cent from the first to the fourth quarter of FY16 (including 0.3 per cent from Panaya) and for the lower end of 6.2 per cent, it needs 2.7 per cent CQGR," HSBC Securities & Capital Markets said in a post-earnings note. "The top end of the forecast already looks challenging, as the second half is seasonally weaker. The management expects the second half to be stronger due to a change in technology spending patterns, but we have heard that earlier, too," it added.

"Infosys has alluded to the information technology (IT) sector undergoing a structural change, with the traditional model dying out. Thus, newer areas of revenue growth such as SMAC (social, mobile, analytics and cloud) and the need for focused acquisitions become a necessity. However, it will take several quarters before the impact of newer areas starts to reflect in financials, even as the existing business is likely to remain growth-challenged in the near term, with the IT major likely to grow close to the lower end of its dollar revenue estimate," Harit Shah of Karvy Stock Broking said in a note.

In terms of regions, almost all key markets reported declines on a sequential basis, with European operations recording 6.1 per cent contraction, rest of the world 5.7 per cent and India 4.1 per cent. Most of verticals also saw declines during the quarter, with the banking, financial services and insurance segment, the largest for the company, reporting a decline of 1.3 per cent and energy, utilities, communications & services 6.7 per cent.

"Infosys reported a disappointing set of numbers, with 0.4 per cent de-growth in revenue on a constant-currency basis. The negative surprise came from a 1.7 per cent decline in realisations," said Dipen Shah, head (private client group research), Kotak Securities.

"The long-term strategic plan reflects Infosys' focus on next-generation services and delivery models. Infosys is working on multiple projects in areas such as open source technology, design thinking and platforms. We believe these initiatives will shore up the growth rates of Infosys and sustain margins over the longer term," he added.

Following the results, Sikka said the company aimed to clock $20 billion in revenue by 2020 ($8.7 billion in FY15), and an operating margin of 30 per cent due to higher employee productivity.