Infosys: Back to square one

Growth decelerates; future clouded by uncertainty

Infosys reported a lacklustre performance for the September 2017 quarter with key geographies and verticals not showing any turnaround. It also sharply revised down its revenue guidance for the full year to 5.5-6.5 per cent in constant currency from 6.5-8.5 per cent. Growth has slipped to pre-Sikka times.

Revenue growth, which revved up to double digits in 2015-16 (to 13.3 per cent in constant currency), has lost steam in the past one year. In the September quarter, growth has slipped to low single digits, which is 4.6 per cent in constant currency terms, over the same period last year. TCS had managed a 7.1 per cent growth in the September quarter.

Infosys is trading at a valuation of 14.6 times its likely earnings for 2017-18, which is at a discount of 24 per cent to TCS.

Historically, the valuation gap between the two companies has been 14-15 per cent.

Though post the June quarter results, when Infosys did better than TCS, it looked like the company may bridge its valuation gap with the latter (the gap then was 15 per cent), it now appears a tough task. The uncertainties around appointment of the new CEO will continue to weigh in on the stock. A recent report from Ambit Capital indicates that P/E ratios for IT companies are highly sensitive to the profile and performance of CEOs.

As there is no definite deadline for the appointment of the new CEO and the market may take time to re-rate the stock even after the new CEO’s appointment to see his how he delivers, the stock may face tough times over the next few months.

Uncertainty

The only comfort for investors now is that it looks like much of Sikka’s strategy is being retained by the current management team. But the question is whether this will continue. Once the new CEO assumes office, he may revisit the sales strategies, and, if it doesn’t go well with the clients, business may suffer.

Client numbers of the recent September quarter show that there is already an indication of some difficulty. The company added 72 new clients, but most of them were in the small buckets. In the $100-million-plus bucket, there was only one new client, and none in the $75-million-plus and $50-million-plus buckets.

The top 25 accounts for the company now account for 36 per cent of the revenue, down from 37 per cent in the same quarter last year, indicating weak client mining.

Attrition rate has also risen. It stood at 17.2 per cent, up from 16.9 per cent in the last quarter and 15.7 per cent last year.

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