News Analysis

Infosys’ sequential growth sputters despite digital boost and large deals

Vivek Ananth BL Research Bureau | Updated on July 15, 2019 Published on July 15, 2019

Management says fall in margin is due to seasonal factors

Infosys posted a lower net profit in the June quarter of FY20, at ₹3,798 crore (down 6.8 per cent sequentially), despite robust growth in digital revenues. Revenues rose marginally by 1.23 per cent to ₹21,803 crore as the company’s core offerings saw revenue remain flat.

In dollar terms, digital revenue ($ 1.12 billion) grew by 8.6 per cent sequentially while core revenues fell 0.64 per cent to $2.01 billion. Most of the growth in revenues came from communication and energy business segments in constant currency terms, with the former growing 4.6 per cent and the latter 4.74 per cent.

Financial services saw muted revenue growth in constant currency terms at 1.67 per cent. It makes up nearly one-third of Infosys’ revenues in dollar terms. The management is confident on growth from financial services, despite softness in some pockets. There were two customers added in the $100-million category and six in the $10-million bucket, during the quarter. It lost one customer in the $50-million bucket during the quarter.

Guidance upgrade

After sewing up $2.7 billion of deal in the quarter, one of the highest in a quarter, Infosys upgraded its yearly guidance on revenues. The company moved its full year guidance on consolidated revenue in constant currency terms upwards to 8.5-10 per cent from 7.5-9.5 per cent. It maintained its margin guidance at 21 – 23 per cent.

Operating margins fell sequentially to 20.5 per cent from 21.5 per cent in the March quarter of FY19 because of higher employee costs and travel costs. The June quarter coincides with pay rises for staff. Consolidated staff costs rose by 1.9 per cent to ₹12,302 crore. Even so, this is the fourth straight quarter where the company’s margins have shrunk.

Last financial year, the company’s focus was on investment for the future, hence the margin fall was understandable. The management says the margin fall in the June quarter in FY20 is due to seasonal factors like pay hikes.

Attrition was marginally higher at 23.4 per cent, which can be attributed to seasonal issues when employees depart for higher studies. The attrition, however, is higher among lower levels compared to high performers. The management said they are trying to evolve a strategy to contain the high attrition levels.

Return of capital

Infosys revised its capital allocation policy upwards, which will now entail distributing 85 per cent of its free cash flows to investors cumulatively over a five-year period. The management is confident of meeting its future investment needs even after the change in its capital allocation policy, with nearly $3.5 billion in cash reserves. They said the company will leverage this cash balance, if necessary, for acquisitions in the future.

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