Bangalore: Infosys Ltd cautioned investors on Friday that a real turnaround in fortunes may take longer as the company continues to steer through a tough macroeconomic environment amid an organizational overhaul led by N.R. Narayana Murthy , who returned as executive chairman last month.
Shares surged as much as 15% as India’s second largest software exporter reported better-than-expected first quarter (Q1) earnings. They ended 10.92% up at Rs.2,802.75 apiece on BSE, while the benchmark Sensex gained 1.44% to 19,958.47 points.
After several quarters of single-digit annual revenue growth and missing its own forecasts at least twice in the past one year, the company surprised investors and experts alike with its June quarter performance, during which it gained about $600 million of business through seven deals from clients, and maintained its revenue growth forecast of 6-10% for the 2013-14 fiscal.
Infosys, the former sector bellwether of India’s $108 billion information technology (IT) industry, reported a 3.7% rise in net profit to Rs.2,374 crore in the three months ended June from a year ago. Sales rose 17.2% to Rs.11,267 crore. A Bloomberg estimate had pegged profit at $390.59 million and revenue at $1.83 billion.
But chief executive officer (CEO) and managing director S.D. Shibulal said it was too early to call the latest quarterly performance a sign of a turnaround and the company will have to wait and watch for a few more quarters.
“I would not consider this as a secular trend at this point of time,” Shibulal said at a post-earnings conference in which he fielded questions with an aplomb that seemed to have been born of the good results. “We’ve done reasonably well this quarter, (but) there are multiple challenges ahead of us.”
Shibulal, the last of the founders to lead Infosys before he retires in two years, said not much has changed from the past few quarters in terms of demand in the top markets of US and Europe.
“It does not change the needle that fast,” said Shibulal, referring to the company’s performance this year and the ratio of revenue generated from its traditional IT business and newer areas such as cloud computing.
Under US accounting rules, in dollar terms, for the April-June quarter, Infosys posted a net profit of $418 million, compared with the year-earlier $416 million. Revenue rose 13.6% to $1.99 billion. Sales from North America grew nearly 5% sequentially, while European revenues declined 3% sequentially.
“The reality is that we’ve seen volatility in our performance over the last three-four quarters. We’ll need to wait a couple of more quarters to decide whether this is a secular trend or not. Because of the volatility we’ve seen, because of some of the challenges we’ve faced, some of the challenges of the past we continue to face, we’ve remained cautiously optimistic,” said Shibulal, who became CEO in August 2011.
“The reality is that we have a higher dependency on discretionary spend...higher than the industry average, and we are faced with regulatory challenges from a couple of countries as well as velocity of discretionary spend is not secular in nature,” said Shibulal, referring to the immigration Bill that is being pushed in the US Senate.
The Bill has the potential to disrupt the traditional business models of Indian IT firms as it would significantly raise the cost of doing business in the country.
Infosys also earns 34% of its overall revenue from areas such as consulting and package implementation, which fall under the category of discretionary spending for clients.
Some experts said it would be too early to call the performance a turnaround.
“You can’t judge this based on one quarter—you’ll have to see whether this continues for the rest of the fiscal year,” said Ian Marriott, research vice-president at technology researcher Gartner Inc.
“Given discretionary spending has not picked up as evidenced by Oracle/Accenture results and TPI commentary last night, this indicates—(a) this performance maybe short-lived and not indicate return to steady growth rates, (b) some of the large strategic deals have been delayed,” said Ankur Rudra, technology media and telecoms analyst at Ambit Capital Pvt. Ltd.
Since chairman Murthy’s return, there has been a reorganization of senior management, with board member and head of the India business, V. Balakrishnan, being made chairman of Lodestone, a company Infosys acquired last year. Ashok Vemuri, who heads the company’s Americas business, is temporarily overseeing the sales force after Basab Pradhan resigned as global sales head earlier this week.
“If we continue to see this (performance) for the remainder of the fiscal year, then we should be very happy. At first sight it would appear that the restructuring and refocusing is starting to have a positive effect,” said Marriott of Gartner.
Earnings of rivals Tata Consultancy Services Ltd (TCS) and Wipro Ltd later this month are being keenly awaited by the market and analysts.
Analysts at brokerage firms, including Morgan Stanley and JPMorgan Chase, were expecting Infosys to lower its annual revenue guidance.
Some analysts said Infosys could be on its way to beating its annual revenue guidance of 6-10%.
“While we have been positive on Infosys stock, we must admit that this result has surprised us positively,” said analyst Nimish Joshi of CLSA in a post-earnings note.
He said the credit for this should go to actions taken by the management before Murthy’s return.
“While Narayana Murthy’s entry will likely drive organization-wide changes, much of the credit of this quarter performance goes to the earlier management team. It remains to be seen what extent of changes are effected by Narayana Murthy,” he said.
To be sure, investors have been getting their own forecasts wrong during the past year, and despite their new-found optimism on Friday, Infosys continues to lag behind industry growth.
The guidance of 6-10% that the company maintained is still far lower than average industry expectations. In February, industry lobby Nasscom had forecast 12-14% revenue growth for Indian software exports for the 2013-14 fiscal.
Some investors continued to favour rival Cognizant Technology Solutions Corp., which has beaten Infosys in quarterly revenue for the last four quarters.
“Investors were focused on a number of important data points/metrics, including revenue stability, quarterly margin trends, margin guidance (given multiple moving parts) and new client additions. While management delivered on these metrics, collectively, Infosys’s results are yet to benefit from the ongoing restructuring as well as from recent management changes. We prefer owning Cognizant considering its superior growth rates combined with an attractive valuation,” said analyst Moshe Katri of US-based brokerage firm Cowen and Co.
Infosys, which was once an investor favourite owing to its ability to outperform market and sector expectations, has lost significant market share to rivals such as TCS and US-based Cognizant over the past two years.
Last year, Infosys missed the lower end of its revenue forecasts at least twice and stopped giving quarterly revenue forecasts in the June quarter. Infosys said in April 2012 that its fiscal 2012-13 revenue would grow 8-10%, but lowered the forecast to 5% after the June quarter.
The sluggish growth rates and increasingly impatient investors prompted Infosys to re-examine strategy and it started cutting prices for select clients. The company also entered revenue-sharing agreements with firms such as IPsoft Inc. to drive up business volume, even at the cost of margins.
Shibulal has repeatedly been criticized over the past two years for sticking to his controversial 3.0 strategy that aims to generate one-third of the company’s total revenue from newer areas such as cloud computing and big data analytics, prompting experts and investors to wonder whether Infosys had lost its focus on winning traditional “bread and butter” outsourcing business.
Last month, during the company’s annual shareholders’ meeting, Infosys for the first time conceded that it had lost focus on its traditional business and would refocus its core strategy towards winning large outsourcing contracts. The company said, also for the first time, that it would follow a flexible pricing strategy to win fresh business, even at the cost of profit margins.