Is Infosys out of the woods?

Given the rough ride Infosys has had in the recent past, investors will do well to exercise some caution
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First Published: Fri, Jan 11 2013. 10 24 AM IST
Infosys has maintained its organic revenue growth guidance for financial year 2012-13 at the 5% level it had indicated three months ago. Most analysts had expected the company to lower guidance by 1-1.5%. Photo: Aniruddha Chowdhury/Mint
Infosys has maintained its organic revenue growth guidance for financial year 2012-13 at the 5% level it had indicated three months ago. Most analysts had expected the company to lower guidance by 1-1.5%. Photo: Aniruddha Chowdhury/Mint
Updated: Fri, Jan 11 2013. 11 10 PM IST
Infosys Ltd is back with a bang. At least that’s what the 16.9% jump in the company’s shares suggests. The company has undoubtedly delivered a positive surprise in the December quarter, after disappointing investors successively in the past two years.
Revenue grew 4.2% to $1.87 billion in organic terms, i.e. excluding that added through the acquisition of consulting firm Lodestone Holding AG. And it expects organic growth of 2.8% in the March quarter, based on its annual target. The moot question is if these steady growth rates are here to stay.
It must first be noted that the December and March quarters have historically been weak ones owing to a higher number of non-working days. No one was expecting the company to report a turnaround during these relatively soft quarters. After all, in the preceding quarter ended September, which has traditionally been a strong one for information technology (IT) services companies, Infosys had reported growth of merely 1.7%. What’s more, the company’s comments to analysts in early December also suggested that its organic revenue growth guidance will be cut. Analysts at JPMorgan and Kotak Institutional Equities said in their results preview notes that they expect the company to reduce the fiscal year 2012-13 organic revenue guidance by 1% and 1.4%, respectively. In fact, analysts have been so taken aback that one of them asked in a call with the company whether the December quarter revenue included any one-time revenue.
While there is no one-off revenue, there are a number of factors that helped Infosys beat estimates, and investors must note that some of these are lumpy in nature and may not aid growth in the future. For instance, the company’s products business led by Finacle grew 7% and the business process outsourcing business grew 12.9%. The India business grew more than 40% sequentially thanks to two large orders from India Post and the ministry of corporate affairs. These growth rates are clearly not sustainable.
Chief financial officer Rajiv Bansal laboured to point out on the call with analysts that in the core IT services business, volume growth was just 1.5%. This, in fact, is lower than the growth reported in the September quarter. The only reason IT services revenue grew 3.3% was a 1.8% increase in the average realized billing rate last quarter. The company also said this isn’t a function of an increase in billing rates. The average realized rate increased because of a higher proportion of consulting and large transformational deals last quarter, which have much higher billing rates. S.D. Shibulal, chief executive officer of Infosys, said that in the current environment, it will be challenging to get continued pricing growth. He added that the macro environment has not changed in the past three months and demand continues to be volatile.
Having said all this, there is little doubt that things at Infosys have changed for the better in the past three months. The large deals it announced in the September quarter have started contributing to revenue. In addition, it announced eight other large deals with a total contract value of more than $700 million, which will contribute to revenue in future quarters.
In sum, Infosys’s results aren’t as spectacular as the 16.7% jump in the company’s shares suggests. But after having underperformed for two years, it does look like the company will get closer to industry growth rates soon. Needless to say, this will lead to portfolio shifts, given that the stock has underperformed for a long time.
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First Published: Fri, Jan 11 2013. 10 24 AM IST
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