Infosys Q2 Net up 1.6%; revenue guidance still conservative

Infosys, India`s second-largest software services exporter, posted a quarterly profit which missed analyst estimates, and raised the lower end of its revenue guidance for the fiscal year ending in March.

PTI| Updated: Oct 11, 2013, 15:09 PM IST

Bangalore: Infosys, India's second largest software services exporter, today reported lower than expected 1.6 percent rise in September quarter net profit, but raised the low-end of its sales forecast for the full fiscal.

Consolidated net profit rose 1.6 percent to Rs 2,407 crore in July-September this fiscal from Rs 2,396 crore a year ago on a charge related to visa use in the US, Infosys said in a statement.

The city-headquartered firm raised the lower-end of its revenue forecast for the 2013-14 fiscal to 9-10 percent from previously projected 6-10 percent. It also revised its rupee revenue guidance upwards to 21-22 percent from 13-17 percent earlier for the same period.

Infosys, which has been under investigation in the US over the past use of temporary employment visas, said it has made a provision of about Rs 219 crore in the matter.

July-September is the first full quarter since co-founder N R Narayana Murthy came out of retirement to become executive chairman as Infosys posted almost two years of disappointing earnings.

Reacting to the results, shares of Infosys' -- once considered an IT industry bellwether -- jumped 7.54 percent to Rs 3,360, its 52-week high on the BSE.

Commenting of the performance, Infosys CEO and Managing Director S D Shibulal said: The growth in second quarter was broad-based and the net client additions (37) was among the highest in the company's history, which included five of the Fortune 500 companies."

In dollar terms, however, the NYSE-listed firm's profits fell 11.1 percent to USD 383 million in September quarter of this fiscal from USD 431 million in the year-ago period. Its revenues rose by 15 percent to USD 2.07 billion from USD 1.80 billion during the review period.

Infosys CFO Rajiv Bansal said: "The impact of 300 basis points on margins due to wage hikes was to an extent met by rupee depreciation helping margins by 250 basis points."

On deals, Shibulal said: "We closed five-six large deals, which are mostly USD 50 million and over and its effects will get realised over the next three-five years."

Infosys's million dollar clients rose to 459 in the September quarter. Majority of deals (13 clients) came from North America as discretionary spending saw an uptick.

During July-September quarter, Infosys added 68 clients (net 37 clients) taking the total count to 873 with most of the additions coming from USD 10 million and less bracket.

Products and Platforms business secured 15 wins in the second quarter, besides, 18 wins by Finacle across South Asia, Southeast Asia, Middle East, Europe and Australia-New Zealand.

On revenue guidance, Shibulal said: "Our guidance is 9-10 percent (9.9-10.9 percent in constant currency). We are doing a lot of changes internally to make sure that we achieve our aspirational financial growth, which is higher growth and higher margins but these things take time to realise.

"They cannot be done overnight, there are no silver bullets and there are changes being made which will take time to realise and because of that we need to remain cautious."

Meanwhile, Infosys said it has been under investigation in the US, which accounts for a major chunk of its revenues, over the past use of temporary employment visas.

It is engaged in discussions with Attorney's office and other government departments regarding a civil resolution of the government's investigation into its compliance with Form I-9 requirements and past use of B-1 visas, it said.

"Based on the status of those discussions, Infosys has set aside a reserve of USD 35 million, including legal costs. Because the discussions are ongoing, Infosys cannot provide additional details at this time," it said in a statement.

Going ahead, Shibulal said:" Q3 and Q4 are generally weak quarters due to holidays and furloughs. Besides, we are seeing some weakness in the retail and consumer price goods. There will also be some impact of the US government shutdown."

Globally, the US market is responding positively and Europe is showing signs of revival. Financial Services are good and spending is up in Big Data, Cloud and Analytics, he added.

On the issue of exit of senior leadership, Shibulal said: "We have a large leadership pool and a deep leadership skill in place. People do move on, these are high performers with high aspirations and they may want to do different things in life. We have about 550 leaders in tier I, II and III levels."

In recent months, Infosys has witnessed an exodus of its senior executives. The firm saw exit of Ashok Vemuri who headed its operations in Americas, Infosys Vice President and financial services head for the Americas Sudhir Chaturvedi and Global Sales Head Basab Pradhan, among others.

On concerns raised by clients on the exits, he said: "So when people take up new responsibilities, the client cannot be concerned, and so we have to make sure that we have multi-level relationship. I will have a relationship, Gopalakrishnan will have a relationship, and next level will have a relationship."

Infosys said integration of the management consultancy firm Lodestone is complete. It had acquired the Swiss company last year in October 2012 for 330 million Swiss Francs (about Rs 1,932 crore), a move aimed at strengthening its consulting practice and increasing revenues from its European operations.

"The Lodestone integration is complete. So, we are able to pursue transformational opportunities in US. However, one must remember that transformational programmes are in the discretionary spend space and discretionary spend continues to be volatile in this environment," Shuibulal said.

Infosys' cash and cash equivalents stood at USD 4.3 billion as on September 30, 2013 against USD 4.1 billion as on June 30, 2013.

On the excess cash, Infosys CFO Rajiv Bansal said: "The whole industry is going through a churn. This overhang of immigration bill in US, outplacement clause etc so the fact is that you have to keep this cash, it is strategic in nature."

On elevation of Rohan Murty, son of co-founder Narayana Murthy, Shubulal said: "Narayana Murthy had clearly articulated what his role is going to be and he is performing that role. There have been queries from investors and we have responded to those queries."

Rohan recently joined in as Narayana Murthy’s executive assistant.

On acquisitions, he said they will continue to be strategic for Infosys and the firm looks at the areas which will make 'differentiation' to its clients.

"There are multiple things on the radar but I cannot reveal anything further at this moment," Shibulal said when proded further.

On the possible successor to Shibulal in 2015, Lodestone Chairman V Balakrishnan said: "It is too early to talk about succession now. We have a nomination committee. There are some internal candidates, which they have already identified. So the process will go on. We have time and a lot of things can happen in the next one and a half years."

On the immigration Bill and other issues in the US, Balakrishnan said presently the US is solving the debt and budget issues and that is on top of its agenda.

"They have to overcome that then focus on the next one and that will be immigration. I don?t think that immigration bill will be taken up in the next two-three months till they solve the budget and debt issue," he added.

Overall, analysts expressed optimism on second quarter results of Infosys. They said growth during the quarter was broadbased across all geographies and industry verticals.

Angel Broking Research Analyst (IT) Ankita Somani said Infosys reported healthy set of results with dollar revenues significantly ahead of estimates. The company has a one-time impact of Rs 219 crore due to some visa related issues.

"The guidance seems to be conservative as after the First half FY 2014 results reported by Infosys, even if the company posts flat revenue growth in the next two quarters it will be able to achieve 10.5 percent USD revenue growth in FY 2014," she added.

Motilal Oswal Securities VP Rikesh Parikh said the price realisation gain of 1.6 percent has surprised positively.

"For FY 14, Infosys guidance for USD revenue growth band of 9-10 Y-o-Y, was marginal short of our expectation. Our current estimate of USD revenue growth for FY 2014 is 11 percent," he added.

IDFC Securities Director (Equity Research) Hitesh Shah also felt that the firm's revenue guidance for the entire 2013-14 fiscal was on conservative lines.

"FY 2014 guidance implies negative 1 percent CQGR growth for remaining two quarters at higher end. It still builds enough caution despite strong quarter and improving demand outlook," he added.

IndiaNivesh Securities Research Head Daljeet S Kohli said the results was above their estimates on revenue and EBITDA front. However, the net profit was slightly below the street estimates due to Rs 219 crore one time charges (provision for visa related matters).

"The substantial increase in rupee revenue growth guidance was primarily due to change in INR/USD realisation estimates (from Rs 59.01 to Rs 62.61)," he added.