News Analysis

Infosys Q2FY21 results: Digital rules the roost

Vivek Ananth BL Research Bureau | Updated on October 14, 2020

Company ups revenue guidance to 2-3% growth in 2020-21 and margin guidance to 23-24% as demand environment turns positive

Infosys reported decent results for the quarter ended September 30, 2020, helped by a revival in demand for information and technology services. The company’s dollar revenue growth of 6.1 per cent was closer to that of Tata Consultancy Services (TCS) than Wipro.

Infosys’ consolidated net profit during the quarter rose 14.5 per cent quarter-on-quarter to ₹4,845 crore. Its consolidated revenues rose nearly 4 per cent sequentially to ₹24,570 crore, helped by growth in revenues from most of its business segments and across all the geographies it operates in.

In dollar terms, revenues came in at $3.31 billion compared with $3.12 billion a quarter ago, rising 6.1 per cent. This is the highest quarterly dollar revenue number Infosys has reported since the quarter ended December 31, 2019. Infosys’ digital revenues now contribute almost 48 per cent of its total revenues.

The common theme across most Indian IT services companies in the quarter ended September 2020 is revival in demand for IT services from retail (mainly consumer packaged goods) and financial services clients. Infosys is not different in this regard. Most of the demand seems to be for digital and cloud services (among others) to help companies adapt to the new ways of doing business.

Buoyed by the revival in demand, Infosys has increased its revenue guidance for financial year 2020-21 to 2-3 per cent from the previous year. It had guided for a revenue growth of 0-2 per cent in the previous quarter. The company also gave a guidance of earnings before interest and tax (EBIT) margin of 23-24 per cent, compared with the 21-23 per cent it had guided in the previous quarter.

Operating performance

The company’s EBIT margins came in at 25.4 per cent compared with 22.7 per cent in the previous quarter. Curbing of discretionary expenditure and a 1.5 per cent sequential fall in employee costs to ₹13,400 crore during the quarter helped the company report decent margins.

The increase in utilisation (excluding trainees) to 83.6 per cent compared with 81.2 per cent in the previous quarter, and drop in attrition to 7.8 per cent (vs 11.7 per cent QoQ) also helped shore up the margins. The company does not expect the attrition levels to sustain at these low levels once revenue growth is back on track.

The company said pay hikes will be restarted and will be effective from January 1, 2021. Also, Infosys will pay 100 per cent of the variable pay to employees for the quarter ended September 2020, and a special incentive to junior employees.

These decisions will probably have an impact on the margins in the subsequent months. The return of some of the discretionary expenses such as travel, over the next few quarters, might also have an impact on the margin trajectory over the next couple of quarters.

Segment & regional performance

Most of the growth in revenues for Infosys came from three business segments — financial services, retail, and hi-tech. These segments make up nearly 55 per cent of the company’s revenues. Financial services and retail segments saw revenues shrink in the past two quarters, but grew 7.8 per cent and 10.6 per cent sequentially in dollar terms during the quarter.

As for the hi-tech segment, revenues had been growing at a fair clip even during the demand contraction seen in the previous quarter. Revenues from the segment grew 11 per cent QoQ in the quarter ended September 30, 2020.

Going forward, Infosys’ management expects revenues to grow faster in its financial services and hi-tech segments.

In terms of regions, revenues grew from all the regions, with North America (61 per cent of revenues) seeing 4.7 per cent sequential rise in dollar terms. Europe, which makes up for 24 per cent of revenues, saw revenues rise 7.5 per cent sequentially in dollar terms.

Published on October 14, 2020

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