Infosys March results meet estimates but outlook grim

PRESSURE POINTS Both growth and profitability in 201718 lower than 201617

BENGALURU:Infosys Ltd on Friday posted lukewarm fourth-quarter numbers that were in line with Street expectations, but the company’s decision to lower its operating margin band to 22-24% for 2018-19 disappointed investors and suggested that India’s second largest software services exporter continued to struggle to get more yield from its traditional outsourcing business, where profitability is dwindling.

Worryingly for investors, both growth and profitability of Infosys in 2017-18 were lower than what it managed in 2016-17, underlining that former CEO Vishal Sikka’s resignation in August—after a year-long feud with founder N R Narayana Murthy—served as a distraction and hurt the company’s performance.

Besidesprofitability,thelower margin guidance for fiscal 2018-19 and the relatively soft revenue forecast did not go down well with investors on Friday. Infosys’s shares were trading down almost 8% on the Nasdaq at 9.30pm on Friday.

In the January-March period, Infosys reported a 1.8% sequential rise in dollar revenue to $2.8 billion, allowing it to end fiscal year 2017-18 with $10.94 billion in revenue, a 7.2% year-on-year growth, and 24.3% operating margin. In constant currency terms, Infosys managed a 5.8% growth, which was lower than industry body Nasscom’s estimate of 7.8% growth last year.

Infosys had reported a 7.4% dollar revenue growth (8.3% in constant currency terms) and a 24.7% operating margin in 2016-17.

In 2018-19, Infosys expects to grow 6-8% in constant currency terms and expects a 7-9% dollar revenue growth at an operating margin of 22-24%.

Net profit declined 28.2% to $571 million in the March quarter from $796 million in October-December as the Bengaluru-based company had booked a $225 million gain on reversal of income tax expenses in the US in the third quarter.

A Bloomberg survey of 26 analysts had forecast Infosys to report revenue of $2.79 billion, or ₹18,116 crore, in the quarter. The analysts estimated the company to report a net profit of $569.89 million, or ₹3,702 crore, in the period. The Infosys management put on a brave face.

“In Q4, we had strong revenue growth. I’m happy with our performance,” said chief executive officer Salil Parekh in a postearnings conference. “In terms of our guidance (for 2018-19), given the external factors and the internal factors, we’ve come out with the (6-8% constant currency) guidance. It’s a fairly stable, good outlook for the market that we see today.” Some analysts believe that Infosys’s decision to lower its profitability outlook may not

cheer the market in the short term but will help the company in the long run as it allows it to win more business when commoditised projects are increasingly seeing pricing pressure.

“The markets are likely to view the lower margin guidance band negatively, in our opinion, given the current expectations and the likely impact on FY19 earnings growth,” Diviya Nagarajan, an analyst at UBS Securities, wrote in a note after the company declared its results. “We view this as a longer-term positive as it should allow the company to focus on revenue and market share.”

Infosys shares closed up 0.58% at ₹1,169 on the BSE on Friday, while the benchmark Sensex gained 0.27% to end at 34,192.65 points.

Nearly nine months after the departure of former CEO Vishal Sikka, Infosys has eviscerated the last remaining pieces of the former SAP executive’s legacy at the company and decided to start on a clean slate—the clearest sign

yet of the company’s roadmap under the stewardship of non-executive chairman Nandan Nilekani and new CEO Salil Parekh.

On Friday, Infosys effectively conceded that the large acquisitions that it undertook under Sikka had failed to bear fruit, with the company deciding to jettison two companies—Skava and the controversial Panaya— through a proposed sale, which many analysts interpreted as a fire sale of sorts.

Infosys bought the companies on Sikka’s watch. It spent $320 million on the two. Now, less than two years later, it has decided to sell them. More tellingly, Infosys has written down $90 million— nearly half the amount it spent buying Panaya.

Infosys also undertook a reshuffle of sorts of its board, with the company deciding to name Kiran Mazumdar Shaw as its lead independent director, which according to one executive suggests that Infosys is looking at Shaw to lead the board whenever Nilekani decides to quit.