Infosys shares hit record high after profit beats estimates
Infosys posts a 6.7% rise in third-quarter profit in dollar terms and raises the top end of its full-year revenue guidance
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Mysore: India’s second largest software services exporter Infosys Ltd on Friday raised its full-year revenue forecast after surpassing profit expectations for the third quarter in a row, signalling its return to a more consistent growth trajectory and cheering investors who propelled its stock to a new record.
Infosys also confirmed that it’s considering spinning off a business that’s at the core of its contentious 3.0 strategy into a separate unit, and said the joint president structure it had put in place with the elevation of two key executives would make for a smoother succession after chief executive officer (CEO) S.D. Shibulal retires next year.
The company raised its revenue growth projection for the year to 31 March to 11.5-12%, from the 9-10% it had forecast earlier, taking into account a significant contribution from Europe-based subsidiary Lodestone Holding AG, a firm it acquired in 2012 for about $350 million and renamed Infosys Lodestone.
In the three months ended 31 December, net profit rose 6.7% to $463 million, compared with $434 million in the year-ago period on a 10% jump in revenue to $2.1 billion.
Analysts on average had been expecting a net profit of $435 million on revenue of $2.1 billion, according to Thomson Reuters estimates. In rupee terms, Infosys posted a net profit of Rs.2,875 crore on revenue of Rs.13,026 crore.
Investors cheered the result. Infosys shares hit a lifetime high of Rs.3,556 in morning trading before paring some of the gains and closing 2.84% higher at Rs.3,548.90 on BSE on a day the benchmark Sensex rose 0.22% to 20,758.49 points.
Infosys shares have gained 40% since founder N.R. Narayana Murthy returned from retirement and became executive chairman in June to lead an organizational overhaul at the company he founded in 1981 with six others, and turn around its flagging fortunes.
The latest results could be seen as a sign of a return to a more predictable growth trajectory for a company that over the last three years has surrendered its prized tag as the bellwether of the information technology industry and lost market share to rivals Tata Consultancy Services Ltd (TCS) and US-based Cognizant Technology Solutions Corp. During the period, Infosys missed its own revenue guidance and eventually stopped issuing quarterly forecasts.
A “key positive for Infosys from this result is the likely improvement in investor perception on predictability of financials. After a long time, Infosys stock hasn’t reacted violently on result day and volatility has come down after Murthy’s takeover”, said analyst Nimish Joshi of CLSA India.
But CEO Shibulal struck a cautionary note, echoing Murthy. “We’re undergoing a serious transformation,” Shibulal said in an interview with Mint. “Our aspiration is to deliver industry-leading growth. As Mr Murthy said earlier, it will take time. So, I wouldn’t consider this (quarter’s performance) as a secular trend.”
Analysts agreed. “I think we need to see at least another two such quarters before saying that Infosys is out of the woods,” said Partha Iyengar, vice-president and head of research at Gartner India. “But I think Murthy’s back-to-the-basics formula is taking hold. So in that sense it’s a good sign for Infosys.”
The sagging fortunes of a company, that at one point in the 2000s had been expected to overtake TCS and become India’s top software firm, forced its board to recall Murthy last year to try and reverse its decline.
Eight senior executives have left Infosys since Murthy’s return, including potential successors to Shibulal, who retires as CEO in March 2015. They included Americas head Ashok Vemuri and V. Balakrishnan, an Infosys veteran who headed its business process outsourcing unit.
Last week, Infosys elevated company veterans B.G. Srinivas and U.B. Pravin Rao as joint presidents, adopting an organizational structure similar to that of Cognizant’s “two-in-a-box” model where for every customer account, the company has one senior manager onsite and one overseeing delivery.
The new structure adopted by the company would help it select the next CEO after Shibulal retires, Murthy said in a conference call with analysts. Either Srinivas or Rao could potentially take over the top job once Shibulal retires next year.
In an interview with Mint, Srinivas and Rao also said that the company may consider options that include hiving off its products, platforms and solutions (PPS) business into a separate subsidiary.
The PPS business first came to the fore as part of Shibulal’s controversial 3.0 strategy, which aimed to generate a third of the company’s overall revenues from newer areas of technology such as cloud computing, Big Data analytics and mobility.
Currently, the businesses contribute about 5.5% of overall revenue for Infosys and have underwhelmed expectations of growth over the last three years, given their dependence on discretionary spending by clients that has slowed over the last three years.
“There in fact we’re again re-looking at how much more we need to invest, how can we create a unique opportunity for talent and hence we may even focus on creating a separate subsidiary,” Srinivas said.
Infosys also put in place a new organizational structure on Friday for its Americas and Europe businesses to complement its new dual president structure, creating seven different industry segments, with each of them having separate leaders such as manufacturing head Sanjay Jalona and life sciences head Manish Tandon.
In the quarter gone by, Infosys, which counts the likes of Bank of America Corp. and Procter and Gamble Co. among its top customers, added a large client during the December quarter that would contribute $300 million in annual revenue. Infosys also added a $200 million client during the same period, a sign that it is witnessing improved traction from customers, especially in Europe and India.
However, revenue from North America—its largest market—declined 0.8% sequentially.
Joshi of CLSA India cautioned against interpreting the better-than-expected financial performance as signalling a firm turnaround, saying the next fiscal year would show whether the revival plan under Murthy is really working or not. “Revenue recovery is work in progress and FY15 will be the true test of Infosys’s revenue resilience. The multiple top management exits in last few months also puts the onus of proof on Infosys on this front,” he said.
Attrition for Infosys, which has seen a slew of top-level exits recently, rose 18.1% and its overall headcount stood at 158,404, down from 160,227 in the preceding September quarter.
Murthy said in the conference call on Friday that the company would not hesitate to drop the joint-president structure if it doesn’t work.
“If (the new structure) doesn’t prove itself after a certain amount of time, we will change it. Let me be very clear. At the end of the day our priority is to make this a high-performance organization,” said Murthy.
The Infosys nominations committee, headed by Jeffrey Sean Lehman, has been tasked with finding the company’s next and first non-founder CEO. Mint had first reported in April last year that the nominations committee had started the process of looking at external candidates.
Murthy defended the firm’s recent decision to disband its executive council and adopt a joint-president structure as part of his turnaround plan for Infosys. “We are a company in transformation. We’ve had several initiatives on the anvil to make this a better company,” said Murthy on the call.
“As a man in a hurry, I wanted to get on with the job. (And) when the recommendation on appointing two new presidents came up, our review pointed out that the new governance structure that would be put in place by the two presidents would make the executive council redundant. Therefore, we had to take the tough decision of disbanding the executive council,” said Murthy.
Murthy, who at a recent analyst meeting said that the firm had a large pool of internal candidates to choose its next CEO from, said that recent top-level exits provided an opportunity for other leaders within the company to step up and take more responsibility.
“As far as exits are concerned, let me make a cryptic statement: it is good for them. It is good for the company. We wish them the best. These are people who have added value. And good for company as Infosys has a large pool of enthusiastic executives who can take on more and more responsibility,” he said.
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