Infosys delivers in-line numbers but why isn't Dalal Street enthused?

Panaya drags Q1 profits though revenue improves on the back of large deal wins, good traction in North America.

Infosys, India’s second-largest IT services company, failed to enthuse the street with its numbers, strengthening the belief that the company is yet to return to a stable phase.

The Bengaluru-headquartered company, which a new chief executive officer (CEO) is leading since January this year, mostly delivered an in-line financial performance though it missed the estimates on a couple of parameters. 

Its stock rose 1.12 per cent on the BSE. In the quarter ended June 30, 2018, Infosys reported Rs 36.12 billion in net profit, a growth rate of 3.7 per cent compared to the year-ago period. The consensus analysts’ estimate for profit was Rs 37.41 billion.

Revenue for the period, at Rs 191.28 billion, was mostly in line with expectations, growing 12 per cent on year-on-year. In constant currency terms, revenue growth was at 6 per cent during the first quarter ended June 2018.

However, sequentially (q-o-q), Infosys saw a 2.1 per cent decline in net profit, which was primarily hit by Rs 2.7 billion reduction in the fair value of Panaya, an Israeli automation firm acquired under the previous regime and subsequently put on the block, citing strategic mismatch. 

On a sequential basis, revenue saw growth of 5.8 per cent.

In contrast, TCS posted much healthier growth in the June quarter, when its net profit as well as revenue grew ahead of the analysts’ estimates, at 15.8 per cent and 26.5 per cent on a year-on-year basis, and 6.8 per cent and 6.3 per cent on a sequential basis, respectively.

The area of concern for Infosys was the key banking, financial services and insurance  business, which saw a 1.5 per cent decline even though TCS saw 3.7 per cent growth in the segment, driven by increase in spending by key clients in North America. 

Salil Parekh, CEO and managing director of Infosys, said the company was optimistic as far as BFSI was concerned because almost 40 per cent of large deals closed during the quarter came from that segment.

“We are seeing good traction in the BFSI segment, especially in the specialised areas of banking. The US market is showing good growth and we are witnessing good demand from the insurance segment,” said Parekh.

According to Chief Operating Officer UB Pravin Rao, a couple of clients in the financial services space had done insourcing, which resulted in decline in revenue from the BFSI space.

Sanjoy Sen, a research analyst and doctoral research scholar at Aston Business School in the UK, said: “The Infosys results depict interesting contrasts with TCS. While TCS has started reaping its dividends from a more stable strategy, Infosys is still plagued by the ghosts of its past displays of ‘dynamism’, such as significant write-offs from the earlier Panaya acquisition, despite leadership issues starting to stabilise.”

On the operating margin, the headwind from wage hikes hit Infosys harder than it did TCS.

Its operating margin for the quarter saw a 100 basis point (bps) decline during the quarter at 23.7 per cent, compared to a 40 bps decline by TCS on that front.