COMPASS: INFOSYS IN REPAIR & RENOVATE MODE UNDER NEW CEO

Q4 in line; focus on digital theme to weigh on margins in FY19, while shareholders to get ~130 bn bounty

Infosys’ March 2018 quarter (Q4) numbers were in line with expectations. In dollar terms, the IT major’s top line was up 1.8 per cent sequentially (9.2 per cent year-onyear, or y-o-y). Revenue in constant currency terms was up 0.6 per cent sequentially (6.4 per cent y-o-y). The 24.7 per cent operating profit margin, which was 30 basis points (bps) more than expectation, came as a surprise.

Net profit, however, was weighed down by write-offs of ~1.18 billion, pertaining to earlier acquisitions, which are now on the block. It grew 2.4 per cent y-o-y to ~36.9 billion in Q4.

But analysts and investors would monitor how things shape up in FY19.

Infosys’ FY19 revenue guidance of 6-8 per cent in constant currency terms is exactly what analysts were expecting. The company is focussing more on the ‘digital’ theme, a segment which is around 25.5 per cent of its FY18 revenue and grew 3.6 per cent sequentially in Q4, way more than the increase in overall revenue.

“We will execute our strategy around the four pillars of scaling our ‘Agile Digital’ business, which is $2.79 billion in revenue,” said the recently appointed CEO Salil Parekh.

Most Indian companies have been late starters in the fast-growing digital space as well as in reducing legacy IT revenues which have been under pressure. So, Infosys’ enhanced focus on the digital business should be well accepted by the markets.

The potential long-term benefits of investing in the digital space, however, will come at some cost. Infosys has provided a margin guidance of 22-24 per cent for FY19, which is below the current as well as the levels seen in the past seven quarters. The 100bps reduction in margin guidance can pull down growth in net profit in FY19.

Investing in digital space to leverage business opportunities is one factor responsible for the downward revision in the margin guidance. The other reason is salary hikes covering 85 per cent of its employees from April this year. Despite reasonable Q4 financials, some analysts expect the stock, up 0.6 per cent on Friday, to correct during Monday’s trade on account of near-term pressures on margins and relatively muted growth guidance.

“Given the lower margin guidance for FY19 and weak performance of the banking and financial services, insurance (BFSI), and retail and life sciences (RLS) segments, the stock is likely to correct on Monday,” said Madhu Babu, analyst at Prabhudas Lilladher.

The firm’s BFSI and RLS verticals are still lagging. Revenue from the BFSI segment remained flat on a sequential basis in constant currency terms, while that from the RLS segment declined 0.7 per cent. In case of RLS business, there is a continuous decline in the past several quarters. The BFSI and RLS verticals together account for over 55 per cent of Infosys’ revenue.

But there is some good news for investors. Keeping the policy of returning up to 70 per cent of its free cash flows to investors, Infosys set aside an additional ~130 billion to be distributed in the form of special dividend, among others (possibly buyback), said analysts.