Infosys ups Q1 profit by 13%, lowers full-fiscal sales forecast

 Infosys on Friday reported an over 13 per cent rise in June quarter net profit on new client additions but slashed its annual sales forecast, sending the stock crashing the most in a single day since Vishal Sikka became CEO more than two years ago. 

The consolidated net profit stood at Rs 3,436 crore during the quarter ended June 30. Revenue for the April-June quarter of the current fiscal was up nearly 17 per cent year-on-year to Rs 16,782 crore.

India’s second largest IT services company forecast a 10.8-12.3 per cent sales growth in US dollar terms for 2016-17, down from the previous forecast of 11.8-13.8 per cent as it factored in uncertainties. The cut in guidance sent stock crashing by 8.8 per cent to close at Rs 1,072.25 on the BSE.

This was more than the 8.54 per cent slide in stock on March 13, 2014 but less than 22.24 per cent slump witnessed on April 12, 2013. The previous two big slides too followed the company reporting sluggish growth in revenues.

 “We had unanticipated headwinds in discretionary spending in consulting services and package implementations as well as slower project ramp-ups in large deals that we had won in earlier quarters, resulting in a lower-than-expected growth in Q1,” Sikka said.

The full-year revenue guidance at 10.5-12 per cent in constant currency terms is lower than its April forecast of 11.5-13.5 per cent. Since taking over the helm of Infosys in August 2014, Sikka has focused on “transforming” Infosys by betting big on automation and high-margin areas like artificial intelligence and digital.

Setting a target of USD 20 billion revenue by fiscal 2020, from USD 9.3 billion in 2015-16, he has helped Infosys value rise by 40 per cent in last two years.  In US dollar terms, the consolidated net profit rose 7.4 per cent to USD 511 million in the first quarter of 2016-17, while revenue rose 10.9 per cent to USD 2.5 billion.

Sikka admitted that the company’s performance was “not quite up to the mark”. The operating margin at 24.1 per cent was impacted by wage hikes (1.4 per cent impact) and visa charges (0.8 per cent), but was partly offset by cost optimisation efforts.

Infosys will stick to medium-term margin guidance of 24-26 per cent, the company’s CFO M D Ranganath said. The earnings per share or EPS was Rs 15.03 for the quarter, 13.4 per cent higher than the year ago period.

Infosys, which is chasing a USD 20 billion revenue aspiration by 2020, said that the performance in one quarter will not hold the company back from reaching that milestone. Infosys, which gets 23 per cent of its topline from Europe, saw a marginal rise in revenue from that market. Banks and financial sector contribute a third of Infosys’ revenue. 

Gartner Research Director Arup Roy said Infosys numbers had been “lukewarm” and are reflective of the state of affairs of the market. “Financial services has a tepid environment. Infosys has a higher revenue share coming from discretionary spend and therefore has taken the first beating,” Roy said.

Earlier this year, industry body Nasscom had lowered its growth forecast for software exports to 10-12 per cent in the year to March 31, 2017, down from 12-14 per cent in 2015-16. Infosys added 13,268 (gross) and 3,006 (net) people in the said quarter, taking its headcount to 1,97,050 at the end of June, 2016. The attrition rate during the quarter increased to 21 per cent, but Infosys said it is not a concern yet.

Attributing the rise in attrition to seasonality, COO UB Pravin Rao said “typically in Q1, we have higher exits due to (people going for) higher studies”. While the attrition levels have shot up, Infosys has been able to retain “high performers”, he added. 

The technology major has relaunched its ESOP programme after a gap of about 13 years for junior to middle level management. This will, subsequently, be extended to middle management and senior leaders.

On Visa issues in the backdrop of US elections, Sandeep Dadlani, Infosys President and Head Americas said: “This is an election year, every election year the rhetoric over immigration, over H1B visa goes up dramatically.”