BackHas Infosys got its groove back?
Quick answer: probably. Analysts say early signs are promising but more work is needed. The CEO agrees
Premium
Bengaluru: Infosys Ltd reported higher-than-expected dollar revenue in the three months ended December, and raised its growth outlook for the current fiscal year, as India’s second largest software services firm attempts a strong comeback after years of listless performance.
The Bengaluru-based company said dollar revenue rose 0.6% (quarter on quarter) in the fiscal third quarter to $2.41 billion. Excluding a one-time termination fee a client in the manufacturing space paid the company in the second quarter, the sequential growth was 1.6%.
A survey of 26 analysts by Bloomberg had forecast revenue of $2.36 billion for Infosys.
A resurgent Infosys, riding on 6% and 4.5% sequential growth in dollar revenue in the first two quarters of this financial year, expects to grow between 8.9% and 9.3% for the year, up from its earlier forecast of an at-best 8.4% expansion.
That means Infosys will certainly grow faster than Mumbai-based Tata Consultancy Services Ltd (TCS) this year.
“This guidance is based on what we see now. So there is no question of under-promising and over-delivering," Infosys boss Vishal Sikka told Mint when asked if the company is again being conservative, as Infosys needs to grow only at 1% sequentially in the current January-March period to end the financial year with a growth rate of 8.9%.
If Infosys grows at a 2.6% pace in the fourth quarter, the company will end the year with revenue growth of 9.3%, a marked improvement from the 5.6% growth recorded in 2014-15. Mumbai-based TCS, which recorded a 0.3% sequential decline in revenue in the third quarter and saw its revenue expand 15% last year, needs to grow 5.25% in the last quarter to grow 8% in this financial year.
Investors cheered the company’s performance. Infosys shares rose as much as 6.6% to their highest level since October, before paring those gains to close 4.3% higher at ₹ 1,128.70 on the BSE. The benchmark Sensex ended 0.3% lower at 24,772.97 points.
So, has the turnaround happened?
Infosys’s growth was driven by its performance in Europe, which brings in about one-fourth of revenue and grew 2.2% sequentially. The banking, financial services and insurance sector, which accounts for 33% of the company’s revenue, grew 2.7% over the three-month period; business from energy, utilities and communications clients saw a 4.2% improvement. Operating profit margin declined 60 basis points sequentially to 24.9%, hurt primarily because of pricing pressure in commoditized outsourcing deals. One basis point is one-hundredth of a percentage point.
The company’s net profit grew 0.9% quarter on quarter to $524 million. A Bloomberg poll of 28 analysts had forecast the company to report a net profit of $501.67 million.
In rupee terms sequentially, revenue grew 1.7% to ₹ 15,902 crore while net profit rose 2% to ₹ 3,465 crore.
Still, Sikka stopped short of saying Infosys had finally turned course. Asked if the company will be able to deliver industry-matching growth numbers, he said “much needs to be done". This is understandable, according to experts, who believe that Infosys has a long way to go before it can catch up with Accenture Plc. and Cognizant Technology Solutions Corp.
“Beating expectations and raising guidance amidst secular headwinds and the Chennai floods suggest that Infosys sales engine is firing again," said Thomas Reuner, managing director of information technology outsourcing research at HfS Research. “However, the muted performance in North America is a warning that there is still lots of work ahead." Infosys, which generates over half of its revenues from the US, saw client spending in US decline 0.6%.
“But the continued solid results provide the platform for Vishal to drive change management, most notably to build out capabilities around the strategic focal points of automation and artificial intelligence. While the road to recovery appears less bumpy than a year ago, to catch up with leading providers like Accenture and Cognizant will continue to take an enormous effort," said Reuner.
Many equity analysts termed Infosys’ recent performance “heartening", but added that there is work ahead for the company. A decline in the number of large deal wins in a quarter that had fewer working days is one wrinkle: Infosys won four large deals worth $360 million as against five worth $983 million in the second quarter.
“The results of Infosys’s transformation plan based on improving employee productivity are still some quarters away," BNP Paribas analyst Abhiram Eleswarapu wrote in a note after Infosys declared its numbers. “For now, better execution, a service portfolio geared towards higher client discretionary spending, closer relationship with clients, investment in employees are paying off. Margin could improve from here on a better offshore mix."
“A likely strong fiscal year 2016 exit (13% year-on-year US dollar revenue growth in fourth quarter at guidance mid-point) and build-up in order book ($2.4bn total contract value over last four quarters) place Infosys well to achieve 12-14% dollar revenue growth in fiscal year 2017," Pankaj Kapoor, director of India IT services and software equity research at JM Financial Institutional Securities Ltd, wrote on Thursday in a report titled Picking Up Momentum.
“When you walk around our campuses, one thing we can say is that there is tremendous sense of positive energy in the campuses. There is a great spirit of enthusiasm and confidence. We have created this confidence compared to, say, a year back. I have seen that continually. And we feel very good about this because this is the key reason for all the growth we have delivered all these months," said Sikka.
So, what’s working?
After being appointed the first non-founder CEO of Infosys in August 2014, Sikka first won the trust of his employees, and eventually brought down attrition rates. It was no easy task as Infosys was then haemorrhaging talent, with one in five employees having left the firm between April and June of 2014. Now, Infosys’s attrition rate of 13.4% is the lowest among the Big Four IT firms. Sikka then put his trusted lieutenants in important roles, went for a management and organizational restructuring last year, and started to marshal his team to win the confidence of clients.
In these 18 months, Sikka also made 69,000 employees undertake day-long classes in the user-centric approach of problem finding, Design Thinking. Infosys also started a new approach of Zero Distance Innovation. All this has helped the company differentiate its solution offerings from other IT vendors such as TCS and Wipro Ltd.
“Have we got our mojo back? Yes, in certain industry segments. So, in BPO (business process outsourcing), infrastructure, application development and maintenance, we believe the way we have automated a lot of tasks and I can confidently say we are in much better shape than our Indian peers. But in areas like analytics or, say, consulting-led approach or digital, all the areas which are the future, there is so much to be done. So it will be early to say if we have come back to our glory days but the worst is certainly behind us," said the head of an industry vertical at Infosys on condition of anonymity.
Infosys is a more confident, 193,000-strong company now than it has been in years, and this was reflected on Thursday when all five business unit heads, along with Sikka, the company’s chief operating officer U.B. Pravin Rao and chief financial officer M.D. Ranganath were present when company declared its earnings.
Decades ago, Infosys founder N.R Narayana Murthy encouraged young engineers and senior ranks to attend the quarterly earnings press conferences. However, over the last five years, as Infosys started underperforming, many of the senior executives were absent at such meetings.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
