Q3 performance: Financial services visibility key positive for Infosys

(From right) Infosys co-founder Kris Gopalakrishnan, Chairman Nandan Nilekani, co-founder N R Narayana Murthy, co-founder K Dinesh, and Srinath Batni, a former board member and trustee
Infosys delivered a muted but in-line performance in the December 2017 quarter (Q3) as sequential revenue growth and margins at 0.8 per cent and 24.3 per cent, respectively, were marginally better than analysts’ expectations. Revenue growth was volume-led with retail and energy, utilities and communications doing better than overall growth. Given the holiday season, growth in bigger manufacturing and financial services verticals were flat. Despite the muted growth numbers, the company retained the FY18 guidance on revenue growth of 5.5-6.5 per cent and margins at 23-25 per cent over FY17. 

While its revenue growth at 5.6 per cent for the nine months ended December over the year ago period means it continues to lag the industry/larger peer growth at 7-8 per cent, the company is confident about growth in the financial services space, its largest, accounting for a third of its revenues. After the muted 0.1 per cent growth in Q3 due to budget cuts and slow ramp-up in some accounts, the company indicated that calendar year (CY) 2018 will be better than CY2017 for this vertical. Five of the top eight deals that the company got in the quarter were in this space. This is one of the areas the company has done better than TCS. Analysts believe that given revenue visibility in the financial services space, growth should improve to 6.3 per cent in FY19 and the company is expected to catch up with the sector on the revenue growth metric by FY20. How the company progresses in FY19 will be clearer in April when the company’s new Chief Executive Officer Salil Parekh, who joined earlier this month, outlines his strategic priorities.  

On operating performance too, Infosys, despite taking wage increases, has managed to squeeze in a 10-basis point gain in margins to 24.3 per cent. TCS took all the wage increases in the previous quarter. While an improvement in the onsite mix helped in the quarter, given record utilisation levels and investments in the digital space, it will be difficult for the company to improve its margins from the current levels. The company’s margins for the nine months ended December was 24.2 per cent, well within the 23-25 per cent guidance band for FY18. The share of digital in overall revenues has been increasing for both companies. While the segment contributes over 25 per cent of revenues for Infosys, the share for TCS is 22.1 per cent. 

On the risks front, analysts highlighted attrition of senior managers as a key risk, given the change in the company’s top management after the exit of the previous CEO, Vishal Sikka. There have been revenue leakages over the past couple of quarters with some of the accounts and is expected when there is a transition, says an analyst at a domestic brokerage.