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Business News/ Market / Mark-to-market/  Infosys results: Why investors should ignore Vishal Sikka’s rosy outlook
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Infosys results: Why investors should ignore Vishal Sikka’s rosy outlook

If Sikka's strategies don't bear visible fruit soon, the Infosys stock could start underperforming peers

Vishal Sikka, chief executive officer and managing director, Infosys. The company’s March quarter results were disappointing on so many counts that it is surprising its shares fell by only 6% on Friday. Photo: Aniruddha Chowdhury/MintPremium
Vishal Sikka, chief executive officer and managing director, Infosys. The company’s March quarter results were disappointing on so many counts that it is surprising its shares fell by only 6% on Friday. Photo: Aniruddha Chowdhury/Mint

Infosys Ltd’s March quarter results were disappointing on so many counts that it is surprising its shares fell by only 6% on Friday. The company’s revenue fell by 0.45% in constant currency terms to $2.208 billion, against the Street’s consensus estimate of an increase of 2-2.5%.

Investors were disappointed when revenue growth of Tata Consultancy Services Ltd (TCS) and Wipro Ltd fell about one percentage point short of the Street’s expectations.

What’s more, a mid-quarter survey conducted by Infosys of fund managers included a question on capital allocation, leading to expectations of a large increase in the company’s payout ratio. While Infosys did increase the dividend payout ratio to 50% of profit effective 2014-15, it has left its cash hoard of $5 billion untouched. That’s far from generous, even if the payout ratio has increased from 30% two years ago—Accenture Plc pays out as much as 75% of profit to shareholders.

One of the reasons Infosys shares hadn’t fallen as much as peers in the correction since early March was high expectations on the capital allocation front. With these hopes now being belied, the stock should give up some of its outperformance. Not surprisingly, TCS shares rose by more than 2% on Friday, after having underperformed Infosys by a wide margin in the past year.

Some investors still seem hopeful about Infosys’s prospects, after the company presented a rosy outlook for the future. The firm said it expects revenue to grow by 10-12% in constant currency terms in 2015-16. It needs to be noted, however, that thanks to the weak performance in the March quarter, the asking growth rate in each of the next four quarters is between 3.1% and 3.8%. In the past four quarters, Infosys has grown at an average rate of 1.4% in constant currency terms. According to an analyst with a multinational broker, the target is aggressive.

Three industries—energy, telecom and insurance—which account for about 20% of the company’s revenue, are facing pressures that aren’t likely to disappear quickly. Besides, by the company’s own admission, existing services are facing pricing pressure—of course, it didn’t add that its aggressive stance in the marketplace is leading to a drop in pricing.

Last quarter, average billing rates fell by 1.7% in constant currency terms, on the back of a similar drop in the December quarter. With prices declining, volumes will have to grow at an even higher rate for Infosys to meet its ambitious target.

The company believes its efforts to invest in new technologies and renew existing ones using technologies such as artificial intelligence will help overcome the above-mentioned challenges. But considering that these are still at a nascent stage, this may be asking for too much.

Infosys also said that it aspires to clock annual revenue of $20 billion by 2020, up from $8.7 billion currently, and to improve employee productivity by more than 50% during the same period. It also aspires to widen its profit margin to 30%, from 26% currently, which will mean outsized profit growth. However, as one analyst puts it—since these are aspirations, no one will be able to hold the company accountable to them.

In any case, investors tend to focus on near-term performance. If chief executive officer Vishal Sikka’s strategies don’t bear visible fruit soon, the Infosys stock could well start underperforming peers, after enjoying a great ride since the time he joined the company.

The writer does not have positions in the company mentioned above.

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Published: 24 Apr 2015, 05:13 PM IST
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