Will Infosys do a repeat of FY16?

Without any doubt, first quarter performance of Infosys is better than TCS, be it on revenue or margin front. In the June 2017 quarter, Infosys has reported a 2.7 per cent sequential growth in revenue (in constant currency terms).

The company has shown improvement in revenue growth over last year too — at 6.3 per cent (in constant currency terms) in the June quarter from 5.3 per cent in the March quarter.

On the other hand, though TCS saw an at par year-on-year growth in revenue of 6.3 per cent in June quarter, it was down from 7.5 per cent in March 2017 quarter and 8.6 per cent in the December 2016 quarter (see graphic).

On margin front too, Infosys has done better. The operating profit margin came in at 24.6 per cent, only about 50 basis points lower than the March 2017 quarter. For TCS, though, margins were lower by 230 basis points.

Infosys’ better show on margins was thanks to improved utilisation (84 per cent in June 2017 quarter versus 82 per cent in March 2017 quarter).

If Infosys is able to repeat its outperformance seen in2015-16 in the current year too, its stock can easily bridge its valuation gap with TCS. While Infosys trades at 15 times its expected earnings for 2017-18, TCS trades at 17.7 times.

In 2015-16, after three successive quarters of outperformance, Infosys moved to a five percent premium over TCS, from a 12-13 per cent discount in the beginning of the year. During the June quarter, Infosys has shown a recovery in growth across verticals. The BFSI segment showed a sequential revenue growth of 2 per cent (in constant currency) against 0.5 per cent in the March 2017 quarter. Similarly, in manufacturing, the growth was 1.5 per cent vs. flat revenues of the previous quarter. In energy and utilities, the growth was 4.9 per cent (versus 2.8 per cent), thanks to ramp-up in large deals. The retail segment saw revenue growth of 2.6 per cent versus a 3.1 per cent decline in March 2017 quarter.

For the company’s shareholders who have been disappointed with many negative developments this year — from the spat between the board and the promoters to the allegation of a former employee in the US on discrimination and more recently, the exit of company veteran Sandeep Dadlani — the Q2 numbers are something to cheer. But, it may do well for investors to wait for at one more quarter before placing bets on Infosys.

Pravin Rao, COO, doesn’t paint a rosy picture of the market. In the retail sector, the stress continues, he indicated. BFSI, though better in Q1, shows no clear indications of a revival, he pointed out.

Infosys has seen growth revive in the US and Europe, but it is not anything very material. In North America, revenues were up by 1.3 per cent sequentially (in cc) compared to 1.2 per cent in the March 2017 quarter; in Europe revenue were up 3.1 per cent compared to a decline of 1.6 per cent in the previous quarter. Strong growth was observed only in India geography —where revenue recorded an 11.2 per cent growth (probably from the company’s GST projects).

So, whether the recovery in sales growth seen in the June quarter across verticals will sustain, needs to be seen.

Infosys, though has revised its dollar revenue guidance up, has kept its constant currency guidance for 2017-18 unchanged at 6.5-8.5 per cent.

The company added 59 new clients during the quarter, but of this, none were in the $50/75/100-plus million buckets.

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