Home / Companies / Infosys net profit jumps 28.6% in Q2, shares surge

Mumbai: Infosys Ltd, India’s second largest software services exporter, on Friday reported a higher-than-expected 28.6% increase in fiscal second quarter (Q2) net profit as it added almost 50 new clients and benefited from a foreign exchange gain. The company announced a one-for-one stock dividend, propelling its shares to a record high.

The Bangalore-based company’s consolidated net profit in rupee terms rose to 3,096 crore in the quarter ended 30 September from 2,407 crore a year ago, Infosys said in its first earnings announcement under Vishal Sikka, who took over as its first non-founder chief executive officer (CEO) on 1 August. Revenue at 13,342 crore rose 2.9% from 12,965 crore in the year ago.

Infosys shares surged 6.7% to end at a record 3,888.95 on a day the benchmark Sensex lost 1.28% to 26,297.38 points and the BSE IT index rose 2.29% to 10,680.74 points. The board recommended a bonus issue of one equity share for every share held, Infosys said.

The earnings beat analyst estimates. The company had been expected to report a net profit of 2,951.7 crore on revenue of 13,318.6 crore, according to an analyst poll by Bloomberg.

Infosys, which counts among its clients BT Group Plc, Bank of America Corp. and Volkswagen AG, maintained its full-year revenue growth forecast at 7-9%, lower than the 13-15% average industry expansion forecast by software lobby group Nasscom.

Infosys signed up 49 new clients, including three $200 million customers and 13 $100 million ones, in the quarter gone by and trimmed administrative expenses by almost 10% to 889 crore. It secured seven large deals with a total contract value of $511 million, the company said in the earnings call.

“Digital transformation is reshaping the business of every one of our clients. We see this as a great opportunity to help them renew the core of their business as well as to expand into new frontiers and are seeing early positive results," said Sikka.

“We are renewing every service line, everything that we offer, on the basis of innovation, on the basis of automation," he said, adding that Infosys was building a new information platform that will tap into areas like Big Data, machine learning and analytics that will help the company to win large deals.

On new directions, Sikka said Infosys was in the process of organizing classes on artificial intelligence, design thinking and computer science for all its employees. It will look at a more non-linear (not employee-related) strategy of automation and collaboration, especially to tap into underpenetrated high-growth markets, he said

In dollar terms, the fiscal Q2 revenue at $2.2 billion was up 6.5% from a year ago and 3.1% from the preceding quarter. Dollar net profit at $511 million was up 33.4% from a year earlier and 6% from the preceding quarter.

Indian IT firms earn most of their revenue in dollars and spend most of it in rupees since a majority of their employees work out of the country. Sales from clients in the US and Europe account for about 86% of the revenue at Infosys, which said revenue from North America grew 3.1% in the June quarter from the preceding quarter, while that from Europe rose 4.2%. Domestic revenue declined 5.1% from the preceding quarter.

The operating margin widened to 26.11% in the September quarter from 21.9% a year earlier. Infosys had a foreign exchange gain of 148 crore due to the depreciation of the rupee versus the dollar in the same period.

The IT services volume growth was 3% over the preceding quarter, securities house Emkay Global said. The Ebitda (earnings before interest, taxes, depreciation and amortization) margin—an indicator of operating profitability—improved by about 130 basis points, Emkay Global added. A basis point is 0.01%.

Infosys is going through a “sluggish" growth phase as compared with industry standards, according to Sanchit Vir Gogia, chief analyst and CEO of Greyhound Research, an IT and telecom advisory firm.

“Getting a buy-in from senior management, addressing investors, areas of improvement, becoming more hands-on to the business are the key things that Vishal would have to address for the first 12 months or a short-term goal," said Gogia.

Greyhound Research does not expect any major changes in the next two-three quarters. “The first 90 days (of a CEO’s stint) are more internal-facing. It’s important for Vishal to understand the business, its people and issues revolving around the company," said Gogia. “He should essentially better acquaint himself with the business and develop relationships, and earn trust before making defining changes."

Sikka acknowledged that there was scope to do much better in the areas of client relations, and sales and marketing.

The company’s banking, financial services and insurance services, its largest business segment, grew 32.8% in the September quarter, while manufacturing grew 23.3%, retail and life sciences rose by 23.4% and telecom was up 8.9%.

Infosys said pricing was stable in the quarter.

The company added 14,255 employees (gross addition) during the quarter. It employed 165,411 employees as on 30 September.

The company’s attrition rate remains high at about 20.1%, higher than the 12-14% the management said it will be comfortable with. In a bid to stem attrition, Infosys has promoted about 12,000 employees since April, besides giving a 100% variable bonus to all its employees in the September quarter.

The issue of new stock, which won’t change the par value of the shares, is subject to investor approval and is designed to boost liquidity, the company said. Infosys will also pay an interim cash dividend of 30 per share.

“The numbers are really positive, and the bonus is icing on the cake," said Ankita Somani, analyst with Marwadi Shares and Finance Ltd in Mumbai. “They want to please investors."

Bloomberg contributed to this story.

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