Infosys results provide little reason for cheer
- India’s tightened consumer goods standards could hurt China imports
- Toyota targets 1,000 km driving range with fuel-cell concept car
- Worms could lead to new treatment for Alzheimer’s, other neurodegenerative diseases
- Telangana’s TJAC plans public meeting on ‘unemployment’ on 31 October
- Gold prices surge by Rs290 on Diwali demand
Infosys Ltd’s December quarter results were in line with Street expectations, which isn’t great news because expectations had been running low. Revenues fell 1.4% sequentially to $2.551 billion, largely due to the ramp-down of a large project with Royal Bank of Scotland Plc. (RBS) subsidiary Williams and Glyn.
While the trouble with the RBS project was already known, it turns out that revenues from some other large clients also fell meaningfully last quarter. Revenue from the top 10 clients fell as much as 9.1% sequentially. The RBS project is estimated to have accounted for about half of that decline, which means revenue from other large customers fell 4.5% sequentially.
The company management played this down, saying this was due to the seasonal weakness that is typical of the December quarter. Customers take furloughs and have a lower number of working days at the end of a calendar year.
But the company’s guidance for the full year and the March quarter doesn’t inspire much confidence either. According to analysts at Emkay Research, the annual guidance suggests revenue growth of 0.3-1.8% in the March quarter in constant currency terms, which is lower than the 1.9% sequential growth reported by the company in the corresponding period a year ago.
ALSO READ | Infosys cuts full-year revenue guidance again
The company said certain pockets of headwinds and some client specific changes are responsible for the guidance, even though most of the verticals it operates in look set for a bounce-back. Analysts at Nomura Research said in a recent note to clients that improvement in demand for IT services could be “lagged and likely to reflect only by 2QFY18.”
They added that the recovery is not uniform with the US banking and financial services (BFS) sector improving, and European BFS, telecom, retail and healthcare client financials showing soft trends, and that the policy uncertainty on immigration in US/regulation in BFSI (banking, financial services and insurance) could keep momentum slow at the start of the year.
Infosys and Tata Consultancy Services Ltd’s December quarter results and related commentary provide little reason for any optimism. It’s hardly suspiring stocks of both companies fell on Friday, with the latter falling by over 4% thanks to additional concerns about the change in its leadership.
A silver lining in Infosys’s results was a slight improvement in margins, despite headwinds such as lower employee utilisation due to furloughs and the ramp-down of the RBS contract. Besides, a drop in revenue typically results in lower economies of scale. In fact, analysts at Kotak Institutional Equities and JP Morgan India had estimated margins to fall by 80-100 basis points. One basis point is one-hundredth of a percentage point.
But while higher margins and the better-than-expected profit are welcome, investors are far more interested in growth returning to double-digit levels. In constant currency terms, revenue grew 9.4% year-on-year in the first nine months of the year, and growth is expected to fall further in the March quarter.