News Analysis

Infosys: Surprises galore in Q3

K Venkatasubramanian BL Research Bureau | Updated on January 11, 2019 Published on January 11, 2019

Smart rise in digital revenues, steady addition of large clients big positives

Infosys sprang multiple surprises in the December quarter, by delivering faster revenue growth than TCS, and also upped its FY19 guidance significantly. The numbers are heartening for investors, especially as the third quarter is usually a weak one for IT services players. An open market buyback of shares at a maximum of ₹800 apiece may evoke a positive reaction from the markets.

Robust increase in digital revenues, steady large-sized client additions, and traction in the key financial services segment are some key positive takeaways for Infosys during the quarter.

On a year-on-year (y-o-y) basis, the company reported a double-digit growth of 10.1 per cent, on a constant currency basis in dollar terms, after a gap of 10 quarters.

During the third quarter, the company’s revenues rose by 2.2 per cent sequentially in dollar terms (2.7 per cent in constant currency). TCS’ revenues grew by 0.7 per cent sequentially in the December period. The only dampener for Infosys, if at all, was the slip in operating margins. But Infosys’ operating margin of 22.6 per cent is still healthy and in line with the company’s preferred band of 22-24 per cent. TCS too had witnessed some erosion, with its margins coming in at 25.6 per cent, down sequentially.

 

 

Revenues derived from digital offerings grew by a robust 33.1 per cent y-o-y, and now account for 31.5 per cent of the overall pie, up from 26 per cent in the same period last year. The company has steadily climbed the digital ladder and has been able to tap significantly into client spends in this area.

The financial services vertical, which accounts for 32.5 per cent of Infosys’ revenues, grew at a healthy 3 per cent sequentially, faster than the company’s overall revenue rate. Manufacturing and energy and utilities segments grew at a much faster clip.

Buyback and outlook

Infosys added one customer in the $50-million band and nine in the $10-million category during the quarter.

Overall, the company has witnessed fairly balanced growth during the period.

By increasing its guidance for revenue growth for FY19 to 8.5-9 per cent from 6-8 per cent earlier, Infosys looks set to match or exceed trade body Nasscom’s projected rate for the industry of 7-9 per cent.

Though an up-move is possible in the near term, any significant re-rating in the stock would depend on margins improving or staying steady and not getting eroded as the company chases large deals and revenues.

With TCS looking all set to record double-digit growth for FY19 and the likes of HCL Technologies too likely to do the same, the outlook for the IT services industry looks steady for the foreseeable future, a stark change from the pessimism that was prevalent in 2017.

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