Infosys Q3 2015 Results

Infosys (INFY) is one of the largest software services company in the world based out of India. The company is a bellwether of the Indian software sector and recently came out with a good set of quarterly results. The stock increased by 6% in the Indian markets, as the company surprised the market with Operating margin increasing by almost 60 bps. Infosys has been transforming itself under their new CEO Vishal Sikka. Infosys had fallen behind its other Indian software peers in the last couple of years. This necessitated the return of Infosys founder Mr. Murthy. A lot of the top management was fired/left and finally Mr. Sikka (from SAP) was appointed. The company is making all the right moves under the new CEO. It is focusing on innovation and on retaining employees (gifting of 3000 new iPhones to top performers). Infosys seems a good stock to invest under Mr. Sikka.

Q3 2015 performance

Infosys reported a good set of results for Q3 FY 2015. There was an increase in the margins and revenue growth. It also did well on the employee front by reducing the attrition level and increased its focus on innovation.

1) Revenues – Revenue increased to $2.218 billion from $2.1 billion a year ago. Volume growth was 4.2%, which was the highest quarterly growth in the last 3 years. Dollar revenue growth was 2.6% in Q3 in constant currency and 0.8% in reported currency.

2) Sharp rise in Margins – Gross margin for the quarter stood at 38.7%, which increased by 20 basis points. Operating margins for the quarter achieved a 10-quarter high at 26.7%. Operating margin increased by 63 bps as compared to the last quarter. Net margin for the quarter was 23.5%.

3) Beats Earnings – The company reported net income of $522 million versus $463 million in the last year. The company reported EPS at $0.46 for the quarter. It beat analyst estimate of 43 cents per share.

4) Robust Project Pipeline – Infosys has a pipeline 56 projects in open Infosys’ Information Platform (IIP), which is fast gaining traction and around 12 projects based on artificial intelligence technologies. In Finacle, the company won 18 projects and 20 go-lives across the different regions of EMEA, America and APAC. The momentum is getting better particularly in the Western markets. Finacle is a core banking platform, capable of processing over 21,000 payments per second.

5) Focus on retaining Employees – The company is providing more flexible work-from-home and maternity leave policies and easier transfer policies across centers. For Q3, the company announced a 100% variable bonus pay out. The attrition rate declined in Q3 2015. Employee utilization increased to 83.7% which was the highest in 11 years. Infosys has a high attrition rate as compared to other software service companies. The company is now focusing on reducing the attrition rate and retaining top performers.

6) Future Outlook – The company surprised the market by retaining its full year dollar revenue guidance for FY15 (ending March 2015) of 7-9% y/y growth. The management anticipates Q4 operating margins to be in the 24-26% range.

Challenges

a) Slowing Global Economy – While the USA economy continues to grow strongly, other regions such as Europe are facing economic headwinds. World Bank recently lowered the global economic growth forecast to 3% for 2015. Infosys generates most of its revenues from exports and a slowing world economy is a concern for the company. Many finance companies in the US are cutting down their budget of IT spend, partly because of the fairly significant fines that have been levied.

b) Currency headwinds – The sharp depreciation of the major currencies is also impacting Infosys revenues. The company’s sequential revenue growth in Q3 was adversely impacted to the extent of 1.8% due to USD appreciation against other major currencies.

Stock Performance

INFY performed well in the last one year and gave better returns of 13.82% than the broader S&P market (9.8%). INFY also outperformed its Indian peers like IBM (IBM) and Wipro (WIT) which were down -16.23% and -10.3%. Its stock performance was even better in Rupee terms, given that the Indian currency has depreciated against the USD.

Source: Google Finance

Stock Valuation

The stock is currently trading at $33.86 and has a market capitalisation of $ 38.7 billion. The company’s P/B is 4.7x, which is lower than industry average of 5.4x. IBM has a P/B of 10.9x. The stock is trading at a forward P/E of 18.3x, which is lower that other large competitors such as TCS which is trading above 20x. Given that the company has become more aggressive on capturing marketshare and increasing growth, there is some headroom for the valuation multiple to increase.

Summary

The company witnessed growth in finance, insurance sectors but observed headwinds in retail & CPG, telecom, energy, life science sectors. Clients are focusing more on new technologies and portfolio simplification, cloud apps, marketing operations, building online presence etc. Infosys like other software service companies like TCS are shifting their priorities to the SMAC (Social Media, Mobile, Analytics and Cloud). Technology is becoming more important to company operations around the world with the advent of Internet 2.0 technologies. Infosys is focusing its energies on capturing this new wave of growth, as companies adopt these new technologies. Investors are becoming more positive towards Infosys, as the company is making the right moves and meeting expectations on growth.