Home / Market / Mark-to-market /  Q4 results: Has Infosys’s recovery dissipated before it even started?

Under Vishal Sikka, Infosys Ltd’s recovery started in earnest in fiscal year 2014-15 (FY15). Growth rose from single-digit levels to the mid-teens in FY16; but things have deteriorated considerably since then.

In the March 2017 quarter, volume growth fell to 7.7%, or to half of what it was in the year-ago period.

Growth rates are back to where they were before Sikka joined the company.

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Last quarter’s revenue of $2.569 billion also fell short of the Street’s estimate of fourth quarter revenue of $2.584 billion. Worse still, there are no signs of things improving anytime soon.

The company has forecast revenue growth of between 6.5% and 8.5% in constant currency terms in FY18. Assuming growth falls in the middle of this range, it would be no better than the lows of the March 2017 quarter.

A moot question is if the drop in growth rates is temporary and whether growth will pick up when things turn around for the industry.

“Infosys is gaining share in large deals and the wallets of large clients, and is positioned well to capture discretionary spends. Near-term volatility and risks pertaining to potential tightening of H-1B rules aside, Infosys is making the right investments in automation and digital for sustained profitable growth over the next few years," analysts at Kotak Institutional Equities said in a recent note to clients.

Also, to be fair, industry growth rates have declined in the past few quarters, and it may be argued that Infosys is being dragged down by the challenges the entire industry is facing.

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But not everyone is convinced. The recent underperformance in Infosys shares shows that investors are increasingly questioning the company’s prospects.

Besides, it’s clear that the days of outperformance (in FY16) are a thing of the past.

Among other things, Sikka said “distractions" affected performance in the March quarter. Presumably, the reference was to the run-in the management has had with some of the company’s founders lately, and the massive media coverage on the spat. The announcement that the company’s board has appointed independent director, Ravi Venkatesan, as co-chairman has given rise to concerns that these distractions may be around for some more time.

An analyst at a multinational brokerage firm says Venkatesan’s appointment shows that the founders have had their say, which isn’t a welcome sign.

In its post-results interactions, the company management laboured to highlight an improvement in employee utilization and its ability to restrict a slide in margins last year. But analysts are disappointed with the margin guidance of 23-25% for the next fiscal year.

The rupee has appreciated in recent months, besides which the H-1B visa scare created by the Trump administration can lead to higher costs in on-site services. While investors had an inkling that maintaining margins at around 25% will be a challenge in this backdrop, the lower end of the target range (23%) has come as a disappointment.

With growth stuttering and margins on shaky ground, Infosys has tried to soothe investors’ nerves by deciding on a new capital allocation policy. It will pay out $2 billion from its existing cash hoard of around $6 billion, which is slightly higher than the Street’s expectation of a Rs10,000 crore payout.

Infosys also said it will pay out 70% of annual free cash flow (cash flow from operations less capital expenditure) annually, compared to the earlier policy of paying out 50% of net profit. But this won’t change annual payouts materially, as the company’s free cash flow is far lower than reported profits.

All told, the March quarter results provide little reason to get excited for Infosys investors. The company’s shares have fallen around 4% post- results, adding to the underperformance vis-à-vis its peers and the broad market year-till-date.

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