In­fosys Q3 re­sults pack a punch

Mint ST - - MARK TO MARKET - R. Sree Ram [email protected]

Shares of In­fosys Ltd have risen 27% in the past year, out­per­form­ing the Nifty IT in­dex’s 18% gain. Apart from the fact that the shares came off a low base, there have been signs of im­prove­ment in growth rates un­der the new CEO, Salil Parekh. In that back­drop, the com­pany’s De­cem­ber quar­ter re­sults come as a big re­in­force­ment of that be­lief.

Growth is cer­tainly back to de­cent lev­els. The con­stant cur­rency rev­enue growth of 10.1% from a year ago is no­tably higher than Street es­ti­mates. Im­por­tantly, In­fosys also re­vised FY19 growth up­wards by about 100 ba­sis points. This im­plies growth mo­men­tum should con­tinue into the fourth quar­ter, and re­turn to dou­ble-digit growth is cer­tainly some­thing that will ex­cite in­vestors.

While the re­sults were de­clared after In­dian mar­kets closed on Fri­day, the com­pany’s Amer­i­can de­pos­i­tory re­ceipts rose more than 5% on the New York Stock Ex­change.

Tra­di­tion­ally, the sec­ond half of the fis­cal year is rel­a­tively softer for soft­ware com­pa­nies due to fewer work­ing days on ac­count of Christ­mas and New Year hol­i­days. So for In­fosys to raise its fore­cast based on its sec­ond-half per­for­mance is quite un­usual. The firm raised its growth fore­cast to 8.5-9% from 6-8% ear­lier.

Deal wins have been strong, too. The com­pany won 14 large deals amount­ing to about $1.5 bil­lion last quar­ter. Cu­mu­la­tively deal wins so far in FY19 stand at $4.7 bil­lion, more than dou­ble the or­ders In­fosys booked in the year-ago pe­riod.

But the op­ti­mism is yet to re­flect in its profitabil­ity. Op­er­at­ing mar­gin nar­rowed 1.1 per­cent­age points se­quen­tially and 1.7 per­cent­age points from a year ago. While there were some one-offs, even after ad­just­ing for them, mar­gins were lower than Street es­ti­mates. But in­vestors seem to be in the mood to ig­nore mar­gin-re­lated con­cerns, given the strong pickup in growth.

In­fosys is in­vest­ing in build­ing sales and dig­i­tal ca­pa­bil­i­ties, be­sides giv­ing re­lated com­pen­sa­tion hikes to tame at­tri­tion. In ad­di­tion, tran­si­tion costs in large deals are lead­ing to soft­ness in mar­gins. The in­vest­ments are ex­pected to con­tinue, im­ply­ing the trend of soft mar­gins should con­tinue in the near term.

While growth is back, it has to be seen if mo­men­tum will sus­tain on a higher base. Growth in the last two quar­ters came off a rel­a­tively low base.

That said, In­fosys trades at a size­able valu­a­tion dis­count vis-à-vis big­ger ri­val Tata Con­sul­tancy Ser­vices In­fosys re­vised its growth fore­cast for the cur­rent fis­cal year up­wards by about

100 ba­sis points

The con­stant cur­rency rev­enue growth of 10.1% in Q3 is no­tably higher than Street es­ti­mates

Cu­mu­la­tively deal wins so far in FY19 stand at $4.7 bil­lion, more than dou­ble the or­ders the com­pany booked in the year-ago pe­riod

While growth is back, it has to be seen if mo­men­tum will sus­tain on a higher base Ltd, and the large buy-back should also help sup­port the for­mer’s stock. The buy-back price is at a 16% premium to the last clos­ing price of the stock. Im­por­tantly, it will be im­ple­mented through the open mar­ket route, which means the com­pany will be reg­u­larly buy­ing shares from the mar­ket and this will sup­port the In­fosys stock.

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