Infy puts up a bellwether show

After missing earnings estimates in five of the last eight quarters, Infosys staked claim to the bellwether status on Friday with a thumping all-round performance in the quarter ended December and boosted its revenue guidance for the full year to 6.6% from the 5% given out earlier.

True, wage hike and seasonality lopped 66 basis points (bps) off the operating margins to 25.7%, leading to a muted growth in earnings per share of Rs 41.46. Overall volume growth was also subdued at 2% on quarter.

However, the revenue performance has analysts hopeful of better days to come.
The company closed eight transformational deals amounting to $731 million during the quarter and effected a pricing increase of 1.8%, which helped it tide over currency headwinds, transcending market expectations.

“Despite no changes to the economic environment in the last 90 days, and the impact of Hurricane Sandy, we have performed well in Q3. The Lodestone acquisition also added $39 million (2% of consolidated revenues) to our revenues for November-December. Our growth was broad-based across service lines, but was specially boosted by the 10% growth in consulting revenues,” said S D Shibulal, MD & CEO, Infosys.
In rupee terms, revenue for the quarter was up 5.7% at Rs 10,424 crore; in dollar terms, it was up 6.3% at $1,911 million compared with the quarter ended September.

“Infosys results are finally coming closer to reflecting the demand reality, and if this sustains for the next two quarters, could indicate that the worst phase of the company is behind it and it can stand to benefit from the strengthening demand environment,” said Partha Iyengar, country manager – research, Gartner India.

Rikesh Parikh, VP - markets strategy and equities, Motilal Oswal Securities, said Europe was the “growth driver” during the quarter, with 13 deal closures, growing 14.4% on quarter and contributing 57% of the incremental revenues. “India geography grew 44.7% QoQ on a low base, contributing 12% to incremental revenues.”

B G Srinivas, head – Europe appeared to concur, saying that while the European Union (EU) remains uncertain at the macro level, the business environment is seeing some stability, with existing client accounts have scaled up in the EU.

During the quarter, Infy added 61 new clients, compared with 39 in the last quarter. However, there was a decline in $100 million clients, which went down from 12 to 11 from the last quarter.

“The new guidance in USD revenue growth is 6.5% for FY13,” said Sashi Bhushan, senior research analyst - institutional equities, Prabhudas Lilladher.

“Revision of guidance indicates that the management is confident about growth prospects in the short to medium-term versus last few quarters. With the current set of results, there seems to be a case to a re-rating of Infosys and narrow down of gap between TCS and Infosys but it will depend on how client budgets pan out for next year and Infosys’ share in deal renewals area,” said Ankita Somani of Angel Broking.

Thus, despite the aggressiveness on the deals front, Infosys has decided to maintain its 'cautiously optimistic' 5% USD revenue guidance for the year, seeing economic uncertainty in US and Europe continuing, resulting in flat IT budgets from clients for at least the next year. Its transition from a traditional services to a managed services model – Infosys launched 20 products and platforms this year, sold to 70 clients) – is also forcing it to maintain its guidance.
The upbeat numbers pushed the Infosys stock up nearly 17% to Rs 2,712.60 at close of trading.

The Street is now hopeful of more positive surprises from the rest of the IT brigade who detail their earnings next week.