What to watch for in Infosys’s first quarter results

Infosys’s annual growth is now being put to test on account of Britain’s vote to leave the EU, which has weakened consumer sentiment

‘Mint’ brings to you five things to watch out for when Infosys declares its earnings on 15 July. Photo: Hemant Mishra/Mint
‘Mint’ brings to you five things to watch out for when Infosys declares its earnings on 15 July. Photo: Hemant Mishra/Mint

Bengaluru: Infosys Ltd’s first quarter earnings are due on 15 July, and the big question this time is: will the company revise its dollar revenue growth target downward?

Earlier in April, when Infosys declared its fourth quarter results, the country’s second-largest software firm guided for dollar revenue growth of at-best 13.8% in the financial year 2016-17. This meant that Infosys, which ended last year with $9.5 billion in revenue, estimates to add $1.31 billion in incremental revenue, the highest new business done in a year since inception in 1981. (Infosys first added $1.09 billion in 2006-07 and later $1.24 billion in 2009-10.)

Bengaluru-headquartered Infosys’s annual growth is now being put to test, on account of an unforeseen and rather tragic development. Britain’s vote to leave the European Union last month has made sterling slide over 13% against the dollar and rupee. A weakening consumer sentiment in Europe may force large UK companies to put on hold their tech spend, which could eventually result in less business for home-grown IT firms like Infosys. Although Infosys generates less business from companies in England, as against Tata Consultancy Services Ltd and Wipro Ltd, analysts at three brokerage firms—BNP Paribas, HSBC and JM Financial—still expect the Infosys management to lower down its growth target.

Financial prudence on account of currency fluctuation certainly merits a downward revision, said analysts.

Still, this paper believes that the Infosys management could wait for one more quarter before revising downwards its growth outlook. It is a fact that pound has been on a free fall since 24 June, the day of the referendum, but for now it is business as usual, and only because of the fear of some uncertainty, the Infosys management may not want to make stakeholders nervous by cutting its revenue target.

To be sure, since the start of the year, Infosys, under chief executive Vishal Sikka, has shunned its image of under-promise and over-delivery. An aggressive growth target is testimony of a much more confident management. Hearteningly, steps taken by Sikka have helped Infosys regain momentum: the largest customers are again giving Infosys more business, and the company also has people to complete the job as fewer engineers have left the firm in the last year. Expectedly, investors have rallied behind the current management and believe Infosys to better last year’s 9.1% dollar revenue growth.

Nonetheless, a lot now depends on how Infosys’s chief operating officer U.B. Pravin Rao and head of delivery S. Ravi Kumar implement Sikka’s vision and perform on three things.

First, the management needs to push the year-old measures such as user-centric approach of Design Thinking, and bringing grass root innovation through Zero Distance to a wider set of the 194,000-strong company. Since taking over as CEO in August 2014, Sikka has steered Infosys’s quarterly revenue up by 11.13% to $2.446 billion at the end of March 2016 from $2.201 billion at the end of September 2014. This is largely on account of an 18% jump in business from the company’s five largest customers and a handful of other customers. Infosys now needs to increase business from a wider client base, as it will save the company from uncertainty and volatility, and help achieve its aspiration of becoming a $20 billion firm by March 2021. Although the sales force has implemented some of these steps to better the company’s ability to bag deal wins to $2.8 billion last year, a company of scale of Infosys needs to further improve it to at least $4 billion a year.

This brings the second theme of execution. A lot of initiatives embarked upon by Infosys in the last year and a half, including using automating tools to replace the work of engineers, will start getting reflected this year. Both Rao and Kumar need to take the automation platform beyond just infrastructure maintenance practice. Lastly, Infosys needs to scale up the technology platforms brought from the three buyouts and from minority investments made in eight start-ups in the last 20 months to a wider base of its customers.

Finally, Sikka needs to quickly address the issues plaguing its two subsidiaries, Infosys BPO and EdgeVerve, the products and platforms division. Together, the two completely-owned divisions account for about 13% of the company’s revenue. Growth at both divisions lagged behind the company’s growth last year and both are estimated to have higher attrition than parent IT services. EdgeVerve still does not have a full-time boss after Sikka’s friend and colleague from SAP, Michael Reh, quit abruptly earlier this year.

With this as the backdrop, Mint brings to you five things to watch out for when Infosys declares its earnings on 15 July:

1. Revenue forecast: Brokerage firm BNP Paribas sees Infosys recording 3.9% sequential increase in revenue at $2.54 billion for the April-June period. This is a respectable start. However, Infosys will be mindful that much of the company’s growth for the full-year depends on how it does in the first six months of the year. For this reason, management commentary for the July-September period will be crucial.

2. Management commentary, especially on the impact of UK leaving Euro block: The biggest challenge for Infosys will remain if any of its large banking customers defer their planned technology spend on account of UK deciding to leave the Euro block. Demand from its largest customers, including banks, will be an important barometer. The company saw weak demand from the insurance segment in the last quarter. Infosys is also facing some client specific challenges, including in Sysco Corp, in retail segment. Management commentary on these headwinds will be important to know if these problems were limited to a seasonal slowdown or there are some underlying challenges.

3. Performance of top customers: Since Sikka took over as CEO in August 2014, Infosys has improved its quarterly revenue by 11.13% (highest among the Big Four) to $2.45 billion. In this period, the contribution of the largest client and the top five clients improved 18% and 12%, respectively. However, its 10 largest clients grew 6%, lower than the company’s overall growth. Infosys needs to better the growth of its clients for a consistent performance and, hence, growth of its largest clients in this quarter will be important.

4. Key metrics: Infosys wants to increase its productivity per employee and boost its profitability by 4% to 30%. However, since September 2014, revenue per employee has been declining. Its profitability, too, has remained under pressure as it has been the most aggressive in pricing, while trying to bag large deals. Sikka did mention that one of the priorities for the management this year is to reverse this decline in revenue per employee. Hence, commentary on these two themes will be eyed closely even as Infosys remains on course to increase its revenue to $20 billion by 2020.

5. Weak areas: One sore point in Infosys’s journey since September 2014 has been the underperformance of two of its units, namely EdgeVerve and Infosys BPO. Together, both accounted for a little over 13% of its $9.5 billion revenue last year. The Infosys management has launched blockchain-based platforms for some offerings from EdgeVerve. Infosys BPO named a new boss last quarter as the division struggles to keep pace with its peers. Investors will want to know how Sikka intends to revive these units.