COMMENT. Infy’s turnaround comes to an abrupt end

Only a year back, the market was admiring Infosys for the remarkable turnaround. But now, after four quarters, the company is back to square one.

At $10.2 billion, the revenue in 2016-17 has registered a growth of 8.3 per cent in constant currency terms, much below the growth of 11.5-13.5 per cent, pegged at the beginning of the fiscal. In the March quarter, sequential dollar revenue grew was just 0.7 per cent. On Thursday, the stock was beaten down by 4 per cent on the bourses.

The poor guidance for 2017-18 also unnerved investors. The company has estimated revenue to grow 6.5-8.5 per cent in constant currency terms — this is lower than Cognizant’s guidance of 8-10 per cent growth for CY 2017.

Lost momentum While 2015-16 was good for the company with revenue growth of 13.3 per cent in constant currency terms, 2016-17 has turned out bad. Growth has slipped lower in each of the four quarters. In constant currency terms, y-o-y growth in the March quarter was 5.3 per cent, down from 15 per cent in the March 2016 quarter. Client additions too have slowed down. The company added 71 new clients during the March 2017 quarter. This is lower than the reported addition of 77 clients in the December 2016 quarter and 89 clients in the March 2016 quarter.

In the March 2017 quarter, the market was expecting a sequential revenue growth of 1-1.5 per cent in constant currency terms, but, the company disappointed with a flat revenue. Infosys’ largest geography- North America, saw revenues grow 1.2 per cent sequentially in constant currency terms. Europe declined by 1.6 per cent. Revenues from the banking and financial services vertical recorded a growth of 0.5 per cent sequentially in constant currency terms. Manufacturing and hi-tech verticals saw revenues remain flat.

The one bright spot in the otherwise lacklustre performance, was the operating margins, which stood at 24.7 per cent for the full year 2016-17 (vs. 25 per cent for 2015-16) within the guidance band of 24-25 per cent. In a year when revenues slid sharply, and the rupee’s sharp appreciation against the US dollar was a headwind, the company has done well to hold its margins. However, for 2017-18, the company has given a margin guidance of 23-25 per cent, owing to risks from an appreciating rupee and increased pricing pressure. The company is also planning to develop on-site centres in the US, which may add to costs and eat into margins.

More dole outs? Infosys’ shareholders who have been waiting for a reward from the company have a good news. The company has announced that it will be paying $2 billion of the total of $6 billion of cash with it now to the shareholders in 2017-18, through either dividends or buyback.

In addition to the above, the company has also said that from 2017-18, it will use up to 70 per cent of its free cash flow to pay dividends. But this is not going to bring a significant increase in dividend dole out. In 2016-17, the company paid 50 per cent of post-tax profits to shareholders as dividends, and it amounted to ₹7,119 crore- which was 63 per cent of the free cash flow.

Outlook Global IT spends are dropping, and IT players are going to see their business pies shrink. Gartner recently revised down its estimate on IT spends growth in 2017 to 1.4 per cent, from 2.7 per cent a quarter ago.

Infosys, however, is better placed than many other Indian IT service providers. The company may be able to capture a larger portion of discretionary spends of clients when the industry recovers. It has also been trying to revive its sagging consulting business. The management’s confidence in holding margins by using automation and other levers, is also a positive.