Infosys Q2: How weak rupee gains were offset even as it beat estimates

Gaining from a depreciated rupee against the dollar, better pricing and large deal wins, the second largest information technology (IT) services frim Infosys beat market estimates on revenue front but missed the margins expectation in the September quarter of the current fiscal. The company posted a 10.3% jump in its September quarter consolidated net profit at Rs 4,110 crore.

M D Ranganath, chief financial officer (CFO) of the company, said the 150 basis points (bps) margin benefit that came from weak rupee and pricing does not reflect in the operational margin as it has been utilised for higher variable pays, sub-contracting expenses and other spends.

"We had a currency benefit of 80 bps, as you know 70% of our revenue is still in dollar and 30% in non-dollar. Another 70 bps positive impact came from better pricing and reduction in the onsite mix. This was a 150 bps benefit. That was utilised for higher variable pay as well as compensation increases that we had planned earlier for Q2. Also, we had to do certain intervention to check attrition. This accounted for 100 bps. The balance 50 bps was due to higher sub-contracting expenses that we had to make to ensure that our talent supply chain does not get impacted and there was some investment in the localisation that we made," he told the media after announcing the results on Tuesday.

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The operating margin of the IT bellwether in the last quarter was 23.7% against the market expectation that it would breach the upper end of its guidance of 22-24% because of strong currency tailwind in the recent months. Harit Shah, analyst with brokerage firm Reliance Securities, told DNA Money that Infosys's revenues and large deal win for the quarter had come above his expectations but margins disappointed.

According to him, the main drivers of revenues were financial services, retail and digital. He said even though attrition rate had reduced in the June-September to 19.9% from 20.6%, it was still above a comfortable level. "An attrition rate of 14-15% would be a more comfortable level," said Shah.

The tech company's revenues in dollars for the second quarter rose 7.1% year-on-year while it was up 8.1% in constant currency. Sequentially, it climbed 3.2% in dollars and 4.2% in constant currency. Digital, which offers better margins compared to other services, contributed a significant portion of its revenue at 31% and grew at 33.5% annually and 13.5% sequentially in constant currency. The company's large deal wins in the quarter doubled to $2 billion from $1billion in the quarter before.

Salil Parekh, CEO and managing director (MD), said he saw a strong demand outlook due to improved fundamentals in the US and Europe. "Overall, we remain confident. We have made an investment in automation and artificial intelligence (AI) that has started to benefit us. (With) stable pricing and these investments, we see a reasonably bright future," he said.

The company's pricing had fallen by 1.5% during fiscal 2016 and 2017 but has now stabilised. Parekh said the company had a very robust operational cash generation in the first half of the year. "The first steps of our three-year transformational programme are being put in place and are starting to show some traction," he said.

Interestingly, the company has kept the guidance for the current fiscal unchanged at 6-8% for revenue and 22-24% for operating margin despite strong currency tailwind. "That (retaining the earlier guidance) is a disappointment but the strategy of investing for future is a good sign," said the Reliance Securities analyst.

Most analysts are expecting IT sector to gain from the 13% decline in the rupee against the dollar since the beginning of this year. Last week the largest tech services company Tata Consultancy Services (TCS) also reported robust financial numbers. IT lobby body NASSCOM has projected the IT and business process outsourcing (BPO) exports to grow by 7-9% to $137 billion in the current fiscal.

CRACKING DIGITAL CODE
Digital, which offers better margins compared to other services, contributed a significant portion of its revenue at 31% and grew at 33.5% annually

MEETING THE ST
*10.3% – Jump in its consolidated net profit in September quarter  
*7.1% – Rise in dollar revenues for the second quarter  
*31% – Digital segment contributed to its revenue