The country’s second-largest software company Infosys grew 10.9 percent sequentially in profit terms and 2 percent on the revenue front in the quarter ended December 2019.
Dollar revenue as well as constant currency growth for the quarter stood at 1 percent each compared to the same period last year, which matched analyst estimates.
The operating performance in Q3 was below street expectations as earnings before interest and tax (EBIT) grew by 3.1 percent and margin expanded 20 bps quarter-on-quarter (QoQ). This was below the 5 percent and 50 bps expansion estimated by analysts in a poll conducted by CNBC-TV18.
More important was the upward revision in full-year constant currency revenue guidance and the clean chit in the whistleblower case.
- We recommend buying Infosys at current levels & on dips for the long term
- Infosys sees rise in involuntary attrition in Q3
Here are Infosys’ Q3FY20 conference call highlights by Narnolia Financial Advisors:
Management Participants: Salil Parekh – CEO, Nilanjan Roy – CFO, Pravin Rao – COO
Whistler bowler case: The company went through a completely thorough investigation. The finding showed that the allegation was unsubstantial.a) On the large deal, the company is mostly doing SLM (Straight Line) method, however in the recent deal due to the nature of some deal the company had used POC (percentage of completion). Both the accounting method are under company policy.
b) On service credit issue, the company has clearly stated that there will be no material changes in operating guidance (0.02 percent to 0.03 percent) with respect to the multi-dollar deal.
c) The company sees its outsider work and has no change in employee or finance team.
Continued growth in digital business: The company continues to grow its digital revenue. This grew 40 percent YoY in Q3FY20, now contributes 40.6 percent of the revenue. Digital investment across five pillars is now giving fruitful result. The company is seeing demand towards data and analytics, SAAS, user experience, security and IoT.
Large deal signing: The company saw a healthy deal signing with TCV (total contract value) of $1.8 billion. The 56 percent YoY increase in TCV growth was seen in the last 9MFY20. 14 large deals were won during the quarter, out of which net new wins were 32 percent. Seven deals were won in financial services, two each in manufacturing and communication, and one in E&U services, retail and other segments. Total deal TCV reached $7.4 billion.
Lower attrition rate: The initiative taken on attrition caused a reduction in attrition rate to 19.6 percent (down by 1.1 percent). Voluntary employment has further declined to 15.6 percent.
Rise in guidance: Seeing the double-digit in the past nine months, the company has raised its guidance from 9-10 percent to 10-10.5 percent. The company is retaining the EBIT margin guidance of 21 percent to 23 percent for FY20.
Metrics: Utilisation during the quarter declined to 80.6 percent due to furlough (50bps dip). Onsite / Offshore mix also showed 50 bps declines.
Financial services: While headwinds in financial service are still there, the company saw sequential growth in North America aided by stable customer spends and deal wins. The company saw significant impact of furloughs in Europe and Rest of World. Commercial and corporate banks, cards and payment, wealth management and custody portfolio see positive traction across geographies. The company expects the headwinds to continue in the near term, based on market volatility and spending in primary business segments. Positive traction is seeing from North America banks.
Retail segment: The segment remained muted during the quarter. The company remained cautious in near term but hopefully, the company expects to see growth in coming quarters.
Manufacturing: Manufacturing performed strong, the company is seeing continued momentum in existing clients, however weakening economic outlook can impact the spending plans. Infrastructure cloud services are seeing strong tractions and in application-related services, focus is on mobility services.
Energy and utilities segment: Momentum in E&U segment saw a dip due seasonality and client-specific issue. The company expects to see growth due to strong pipeline. Automation, RPA, and technology-led innovation are becoming mainstream in the E&U segment.
Margin performance: Operating margin in Q3FY20 came at 21.9 percent, a 20 bps improvement. The currency benefit came at 10 bps during the quarter. Cost optimisation measure like onsite/offshore mix and operating levers helped margins by 50 bps, while utilisation offset the margins by 40 bps.
The company expects to focus on improving operational levers like rationalising pyramid based on offshore/onshore, improving onsite/offshore mix, and automation. Also, the company is working on stabilising the subcontract cost or hiring the subcontractor as an employee to meet its demand.Replicate the localisation: The company is planning to replicate the onsite pyramid that the company did in America and plans to expand in Europe and Australia in the coming years (non-incremental investment). However, the pace of hiring will be slower than that it did in America.
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