The Hindu Business Line : Infosys Q3: No bad news is good news

Infosys’ third quarter numbers have managed to meet and even marginally exceed its guidance, this time round. Revenues have increased by 4 per cent on a sequential basis to Rs 4,271 crore, while net profits rose 12 per cent.

The numbers indicate that the company’s focus in the quarter has been on margin expansion rather than on volume-driven growth. This is evident from volume-based growth being only at 4.5 per cent. Selling and marketing expenses have come down by over 27 per cent, a factor that may partly explain better margins. More diversified revenues, higher fixed-price billing and no signals on a cut in IT budgets are some of the positive signals from the numbers. The European geography has increased contribution to revenues, offsetting erosion in realisations due to dollar depreciation. Revenues from the US have been flat at 62.3 per cent. In terms of service mix, there has been a reclassification.

Volume-based services such as application development and maintenance have seen increased contribution, while high-margin services such as package implementation, consulting and infrastructure management have remained flat. This, to some extent, alleviates concerns about a cutback in discretionary IT spends as high margin services are discretionary in nature.

A significant increase in fixed-price billings to 32.8 per cent of revenues, is positive as this is a more efficient way of engagement. Attrition at 13.7 per cent has remained stable. Utilisation at 69.4 per cent has come down marginally.

The onsite offshore mix has tended a little bit towards offshore. Client adds, 47 during the quarter including a $100-million plus deal, look reasonable.

Many of these factors may be worked around in future to enhance productivity and manage volume/margin expansion. Delivering IT services from new platforms such as SaaS (software as a service) and deal wins in this segment need to be watched.

Risks and outlook

Uncertainties about the US economy and IT budgets of clients therein remain and clarity on this may emerge only by end January or February. Indications may also be had from TCS’ results next week.

The Infosys stock lost 1.38 per cent and closed at Rs 1,580 on Friday. Continuing lack of visibility on the US front may have resulted in the markets responding to the numbers with caution. However, investors in the stock may have a stronger Q4 to look forward to, it being a seasonally strong quarter. Greater clarity on the macro scenario, a relatively stable rupee and improved cost optimisation may be triggers to be watched, for fresh exposures to the stock.