Infosys beats St with 25% higher net

Infosys, India's second-largest software firm, on Tuesday surprised the Street with a 25% year-on-year growth in net profit for the fourth quarter, though it guided lower guidance for this fiscal.

Sequentially, revenues were below estimates due to slower decision making, weakness in key verticals like retail, manufacturing, hi-tech and BFSI, and lower discretionary spends that are not expected to bottom out till the first half of this fiscal.

The firm also cut its guidance to 7-9% for fiscal 2015 from 11.5-12% in the last quarter due to continued slowdown, rising costs, investments in more onsite hiring and training and wage hikes, also led to a chopping of guidance.

Analysts believe this guidance is plausible, as it entails a growth of 2-2.5% in the next two quarters. However, Hitesh Shah, analyst with IDFC Securities, said, "We expect the company to grow 12-13% in fiscal 2015."

The cautious Infosys management led by managing director and CEO, SD Shibulal indicated that there was scope for a guidance revision in case the next two quarters showed better growth.

Ankita Somani, analyst with Angel Broking, said, "Infosys reported fourth-quarter results with operating margins and net profit ahead of our expectations, and topline came in line with estimates."

Net profit stood at Rs 2,992 crore, up 4.1% quarter on quarter (qoq) and 25% year on year, aided by operating margin gains as well as higher other income of Rs 851 crore as against Rs 731 crore in the third quarter.

Constant currency revenue growth was 1.7% qoq led by merely 0.4% qoq volume growth (largely offshore led). Decline in discretionary spends in the quarter of -3.1% was led by consulting and system integration business, she said.

Bhuvnesh Singh and Hitesh Das of Barclays said, "Quarterly revenues declined 0.4% qoq to $2,092 million in the fourth quarter (1.2% in rupee terms to Rs 128.8 crore). This was largely on the back of slowdown in retail (down 3.5% qoq) and hi-tech verticals, and also a delay in project ramp-ups. Volume growth was flattish (+0.4% qoq, offshore +1.2%, on-site -1.3%), with pricing declining by 0.8% q/q. Focus on margin revival continues as EBIT margins increased 50 bps qoq, largely led by an improvement in gross margins." Margin expansion was also a positive surprise, as analysts on an average were expecting a 100 basis-point decline due to slow revenue growth.

Dipen Shah of Kotak Securites said the client-specific and vertical-specific issues may likely to impact the near-term results.

"However, we believe that the initiatives being taken by the management should lead to higher growth and stable margins in second half of this fiscal and FY16. To that extent, we maintain our positive view on the stock with a medium-to-long term perspective."

The company also reported earnings per share of Rs 52.37, an uptick of 4.1% qoq. The company also disclosed cash and cash equivalents of $5 billion as against $4.4 billion in the last quarter. This led the company to declare a dividend increase of 40% on post-tax profits for shareholders, as compared with 30% currently.

During the quarter, Infosys saw a decline in revenues in all its key geographies as well. Thus, North America declined by 0.8% q/q and 0.7% in constant currency terms, while rest of the world degrew by 1.5% qoq and 0.2% in constant currency (cc) terms. India also grew marginally at 0.1%, while it declined by 0.9% cc. Europe grew 1% qoq and 0.3% cc. Vertical-wise, BFSI degrew 0.5% in both qoq and cc terms, while retail degrew by 3.5% qoq and 3.7% cc. However, manufacturing grew 0.4% qoq and 0.5% cc, while energy utilities grew 2.7%, both on qoq and cc basis.

Infosys added 50 new clients during the quarter (from 54 in the previous quarter), taking the number of active clients to 890 (as against 888 in the previous quarter). That said, the number of $100 million+ accounts decreased by two and $200 million accounts declined by one in the March quarter versus the previous quarter. The company closed 232 $5 million deals in the quarter, as compared with 226 similar-sized deals in the last quarter. Fixed-price contracts represented 41.6% of revenues versus 41% in the last quarter. Pricing declined 0.8% qoq (+0.2% onsite and -0.6% offshore) versus +0.7% qoq in the December quarter.

The company also gave out wage hikes in the quarter of 6-7% for offshore and 1-2% for onsite. This is expected to have a 300 basis-point impact in Q1.

Overall utilisation rates rose qoq to 74.4% including trainees as against 74.1% in previous quarter, and 78% excluding trainees. IT services employees increased by 2001 in the quarter (compared with a decline of 1,823 in the previous quarter), while lateral hiring was 2,100 (versus 3,333 in the last quarter). However, attrition in the quarter remains high at 18.7% (from 18.1% in the last quarter).