Infosys lowered its operating margin band to 22-24% for FY19 after net profit declined 28.2% to $571 million in Q4 FY18 from $796 million in Q3 FY18
Bengaluru: Infosys Ltd on Friday posted lukewarm Q4 results that were in line with Street expectations, but the company’s decision to lower its operating margin band to 22-24% for 2018-19 disappointed investors and suggested that India’s second largest software services exporter continued to struggle to get more yield from its traditional outsourcing business, where profitability is dwindling.
Worryingly for investors, both growth and profitability of Infosys in 2017-18 was lower than what it managed in 2016-17, underlining that earlier CEO Vishal Sikka’s resignation in August—after a year-long feud with founder N.R. Narayana Murthy—served as a distraction and hurt the company’s performance.
Besides profitability, the lower margin guidance for FY19 and the relatively soft revenue forecast did not go down well with investors on Friday. In pre-market trading on the Nasdaq, Infosys shares were trading down nearly 7% at $16.8 a share.
In the January-March period, Infosys reported a 1.8% sequential rise in dollar revenue to $2.8 billion, allowing it to end fiscal year 2017-18 with $10.94 billion in revenue, a 7.2% year-on-year growth, and 24.3% operating margin. In constant currency terms, Infosys managed a 5.8% growth, which was lower than industry body Nasscom’s estimate of 7.8% growth last year.
Infosys had reported a 7.4% dollar revenue growth (8.3% in constant currency terms) and a 24.7% operating margin in 2016-17.
In 2018-19, Infosys expects to grow 6-8% in constant currency terms and expects a 7-9% dollar revenue growth at an operating margin of 22-24%.
Net profit declined 28.2% to $571 million in the March quarter, from $796 million in October-December as the Bengaluru-based company booked a $225 million gain on reversal of income tax expenses in the US.
A Bloomberg survey of 26 analysts had forecast Infosys to report revenue of $2.79 billion, or Rs18,116 crore, in the quarter. The analysts estimated the company to report a net profit of $569.89 million, or Rs3,702 crore, in the period.
The Infosys management put up a brave face.
“In Q4, we had strong revenue growth. I’m happy with our performance," said CEO Salil Parekh in a post-earnings conference. “In terms of our guidance (for 2018-19), given the external factors and the internal factors, we’ve come out with the (6-8% constant currency) guidance. It’s a fairly stable, good outlook for the market that we see today."
Some analysts believe that Infosys’s decision to lower its profitability may not cheer the market in the short term but helps the company in the long run as it allows it to win more business when commoditized projects are increasingly seeing pricing pressure.
“The markets are likely to view the lower margin guidance band negatively, in our opinion, given the current expectations and the likely impact on FY19 earnings growth," Diviya Nagarajan, an analyst at UBS Securities, wrote in a note after the company declared its results. “We view this as a longer-term positive as it should allow the company to focus on revenue and market share."
Infosys shares were up 0.58% at Rs1,169 on the BSE at the close of trading on a day when the benchmark Sensex gained 0.27% to end at 34,192.65. The results were reported after market hours.