Infosys reported lower than expected numbers for Q3FY19 on EBIT and PAT fronts. Constant currency (cc) revenue grew by 2.7% qoq and US revenue came in at $2,987mn, up 2.2% sequentially. Revenue in Rupee terms grew 3.8% qoq to Rs21,400cr, which is higher than the median consensus estimate of Rs21,260cr. EBIT stood at Rs4,830cr, down 1.3% qoq against the median consensus estimate of Rs5,023cr. EBIT margin was down by 118bps on a qoq basis at 22.6%. Ad. PAT declined by 12.2% qoq to Rs3,610cr against the median consensus estimate of Rs4,149cr.
The company has declassified Panaya and Skava from “held for sale” and as a result of this reclassification, Rs88cr was charged as additional depreciation and amortization as per accounting standards. Adjusting for this, the EBIT grew by 0.5% qoq to Rs4,918cr, while adjusted EBIT margins declined by 77bps qoq to 23%. Similarly, there was a charge of Rs451cr for excess of carrying amount over recoverable amount and adjusting for the same, the PAT declined by 4.2% qoq to Rs3,938cr.
Revenue was driven by strong growth in Financial Services, which was up 3.6% qoq cc, marking the second straight quarter above the company average. Energy, Utilities, Resources & Servcies (+7.4% qoq cc) and Manufacturing (+7.6% qoq cc) rounded of verticals with three consecutive quarters of growth.
Financial services growth was on account of sustained momentum in client spends and ramp up in previous deals. Infosys is witnessing momentum in new account acquisitions and expansion of accounts acquired recently.
Energy, Utilities, Resources & Services growth was on account of ramp up in previous deals particularly led by Utilities in Europe and Services in America.
Retail declined by 0.1% qoq cc after posting two consecutive quarters of strong growth. The management attributed this to seasonal weakness but remained confident about the growth.
Communications declined by 0.5% qoq cc. The management attributed the drop to sector specific headwinds and some seasonal weakness. They see opportunities arising out of need for improvement in efficiency and cost reduction.
Amongst geographies, North America and Europe grew by 2.6% qoq cc and 3.8% qoq cc, driving the bulk of the growth. RoW grew by 5.2% qoq cc.
The margins were impacted by drop in utilization / onsite mix (-80bps), compensation increase (-30bps), continued sales investments (-30bps), acquisition (-20bps, owing to intangibles being amortized) and increased depreciation and reclassification of Skava and Panaya (40bps). These were offset via rupee benefit (+50bps), other expenses (+40bps)
Digital services rose 5% qoq cc and 33.1% yoy cc accounting for 31.5% of the total revenues.
TCV USD1.57bn in Q3 with net new TCV accounting for 30%.
The company has announced a buyback of Rs8,260cr under the open market route at a maximum price of Rs800 per share.
The company has revised its FY19 revenue guidance in constant currency terms upward to 8.5-9% from 6-8% earlier. Infosys has retained the operating margin guidance.
The stock currently trades at ~15x its FY20E EPS. A decline in margins was expected, however, the higher-than-expected decline in margins may have been on account of higher investments. We believe that the beat on the revenue front suggests that the risk of execution is lowering for Infosys and margins are bound to remain under pressure in the near term. More importantly, Infosys is readying itself to capitalize on the window of opportunity in the Digital spends space and we believe that better efficiencies and onsite pyramid correction can help in margin defence. We maintain our positive view on the stock.
Infosys Ltd ended at Rs. 683.70, up by 3.95 points or 0.58% from its previous closing of Rs. 679.75 on the BSE.
The scrip opened at Rs. 683.90 and touched a high and low of Rs. 686 and Rs. 672.80 respectively. A total of 1,32,47,503 (NSE+BSE) shares were traded on the counter. The stock traded below its 100 DMA.
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