Q2 results: Infosys beats street estimates, but TCS still ahead of curve

New Delhi: Infosys Ltd posted a surprise 3.2% dollar revenue growth in the September quarter (Q2) from the preceding three months, the fastest sequential growth by India’s second-largest information technology (IT) services company in more than a year.

In constant currency terms, Infosys’s Q2 revenue rose 4.2% from the preceding three months. Currency fluctuations, however, took some sheen off the company’s growth as dollar revenue increased at a slower pace to $2.92 billion in the quarter ended 30 September. Infosys last posted a 3.2% sequential dollar revenue growth in the June quarter of 2017.

Net profit rose 0.5% to $581 million in the September quarter from $578 million in the preceding three months. Operating margin was 23.7%, same as in the June quarter.

A Bloomberg survey of 23 analysts had estimated ₹ 4,048.5 crore ($548.4 million) profit on net sales of ₹ 20,318.6 crore ($2.75 billion).

Infosys’s better-than-expected performance was largely helped by a 4.7% sequential growth from clients in the financial services space, which contributed to 32.2% of revenue. A 4.9% increase in business from retail clients, accounting for about 17% of revenue, also helped the company. For the first time in its history, Infosys won over $2 billion in new deals in a quarter.

“Both TCS and Infosys have done well in the second quarter. But TCS has the edge over Infosys as they have been reporting a double-digit, year-on-year growth for three straight quarters. But a $2 billion in deal wins is encouraging,” a Mumbai-based analyst at a foreign brokerage said on condition of anonymity.

Infosys still faces challenges. Despite its performance in the second quarter and a weakening rupee, it has maintained its full-year operating margin between 22% and 24% and expects revenue to grow between 6% and 8% in constant currency terms. The company does not give a dollar revenue outlook, but it runs the risk of growing at the slowest pace in three years. Infosys reported a 0.9% sequential dollar revenue growth in the first quarter. Business growth is typically slower in the second half of the year for Indian IT firms, and even if Infosys manages to grow revenue by 1% in the third and fourth quarters, it will end the current financial year with 6.8% dollar revenue growth, according to Mint analysis.

Infosys’s year-on-year growth continues to be sluggish. In contrast, TCS—which last week posted a 3.2% sequential dollar revenue increase in the second quarter—has managed a double-digit year-on-year growth for three straight quarters.

Infosys also continues to struggle to retain people. Its attrition was 22.2% at the end of September quarter, a tad better than the 23% at the end of June quarter, but considerably higher than its peers (TCS’s attrition was 10.9% at the end of September quarter).

ALSO READ | Windfall for engineers as IT salaries shoot up

“EBIT margins were at 23.75% vs consensus expectation of 24.5% in 2Q19. Margins were flattish vs 1Q19 despite absence of visa costs, wage inflation and most important INR depreciation,” HSBC analyst Yogesh Aggarwal said in a note to clients.

On Tuesday, Infosys shares declined 0.39%, or ₹ 2.70, to ₹ 696.40 on the BSE, while the benchmark Sensex gained 0.85%, or 297.38 points, to end the day at 35,162.48. Infosys Q2 results were announced after the end of trading in Mumbai.

Infosys also decided to pay its former chief financial officer, Rajiv Bansal, ₹ 13.58 crore in outstanding severance payments, including interest, after an arbitration panel last month directed the company to pay the money.

“The company has received legal advice and will comply with the award and make the necessary payments,” Infosys said in a press release.