Infosys 3rd Quarter Results
Infosys surprised the street with better-than-expected results for 3QFY2013 and also raised its full year guidance, contrary to our as well as street expectations of reducing it. Revision of guidance indicates that the management is confident about growth prospects in the short to medium-term versus last few quarters. The company kept its organic revenue growth guidance for FY2013 intact at 5% yoy while including Lodestone’s acquisition the company expects full year FY2013 dollar revenues to grow by at least by 6.5% yoy.
Quarterly highlights: For 3QFY2013, Infosys reported revenue of US$1,911mn, up 6.3% qoq. On organic basis, dollar revenues grew by 4.2% qoq. Volume growth was tepid though at 2.0% qoq. One more positive take away was that despite giving offshore wage hikes the company’s EBIT margin declined by just 66bp qoq to 25.7% as opposed to a decline of ~100bp that was expected. The PAT came in at `2,369cr, flat qoq, aided by other income of `503cr. Outlook and valuation: After several quarters of lower-than-expected performance, Infosys cheered the street with better than estimated numbers in 3QFY2013. The current quarter performance may support the company’s stock in the near term. However, the company’s management continues to remain cautiously optimistic on the business environment. Management commentary indicates that the environment remains exactly where it was a few months back. Infosys signed eight large deals with TCV worth US$750mn during 3QFY2013. Early comments from the management indicate that IT budgets will be flat to marginally negative in CY2013. Over FY2012-14E, we expect a USD and INR revenue CAGR of 8.3% and 14.6%, respectively. Over FY2012–14E, we expect a CAGR of 8.6% and 9.0% in EBIT and PAT, respectively.
Stellar Performance
For 3QFY2013, Infosys surprised the street with better-than-expected results. The dollar revenues grew by a robust 6.3% qoq to US$1,911mn, ~3.0% ahead of our as well as street expectations. On an organic basis (excluding Lodestone), dollar revenues grew by 4.2% qoq which is also commendable as traditionally 3Q is a lull quarter for IT companies. The cross currency movement aided the company’s revenue by US$9mn. Revenue in constant currency (CC) terms came in at US$1,902mn, up 5.8% qoq. Overall, pricing went up by 1.8% qoq due to change in business mix, especially towards consulting and package implementation services. Overall volume growth remained subdued at just 2.0% qoq (3.7% onsite volume growth and 1.3% offshore volume growth). In INR terms, revenue came in at `10,424cr, up 5.7% qoq. The company signed eight large transformational deals with TCV worth US$750mn during 3QFY2013.Service wise, revenue growth was led by consulting and system integration, the revenue from which grew by 15.5% qoq, majorly due to Lodestone. Lodestone contributed `214cr to the consolidated revenues during 3QFY2013. Excluding Lodestone, revenues from consulting and system integration grew by ~4.0% qoq. Revenues from BPO once again grew substantially by 17.6% qoq; Infosys BPO has been performing considerably well since the past few quarters and it kept its momentum intact during the quarter with addition of 11 new clients. Revenues from IMS and testing services grew by 7.9% and 3.8% qoq, respectively while revenues from company’s anchor service verticals - application development and application maintenance - declined by 1.2% and 0.7% qoq, respectively. Revenue from the products business of the company improved by 9.1% qoq. This is one of the major focus areas of the company; the company added ~US$100mn worth of TCV in 3QFY2013. The total TCV of products and platforms currently stands at US$603mn from US$485mn in 2QFY2013. The company also won eight business transformation deals during 3QFY2013.
Industry-wise, the revenue from financial services and insurance (FSI), the company’s anchor industry vertical contributing 33.7% to revenue, grew by 6.3% qoq, led by a 9.5% qoq growth in revenue from insurance. Revenues from the banking and financial services industry grew by 5.5% qoq. In CC terms, revenue from FSI grew by 6.0% qoq. The management indicated that business prospects will remain muted for the next couple of years for discretionary spend in FSI. The spending from banks and financial institutions is coming from work related to risk compliance, cost cutting, customer centric applications, fraud prevention and risk management. Manufacturing (contributed 21.7% to revenue) posted a 4.4% qoq revenue growth.
In CC terms, revenue from this vertical grew by 4.0% qoq. The company is seeing IT spending coming in the manufacturing industry segment from clients in terms of work related to harmonizing processes and transformation to gain cost efficiency and simplicity. The management indicated that short term growth is expected to come from the US in this space. The retail, CPG and logistics (RCL) segment (contributed 24.1% to revenue) again emerged as the major growth driver for the company, recording a 6.7% qoq revenue growth, led by a considerable 30.8% and 13.9% qoq growth in revenues from lifesciences and healthcare. In CC terms, the revenue from RCL grew by 6.6% qoq. In this industry segment, retail is gaining traction on account of spend related to digital commerce, digital marketing and clients targeting to go global. Strong growth from products and platforms is seen from this industry. The energy utilities, communications & services (ECS) segment (contributed 20.5% to revenue) reported a 7.9% qoq increase in revenues backed by 8.3% qoq revenue growth in energy and utilities. In energy and utilities, work related to EPR led transformation, cloud, and enterprise are IT spend drivers. In CC terms, revenue from this segment grew by 7.1% qoq.
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