Infosys outshines rivals with Q2 performance; net profit jumps 20.5%

Administrator_India | October 15, 2020 | 1 | Infosys

By Administrator_India

Capital Sands

Continuing with its industry-leading performance, Infosys — India’s second largest information technology services company — on Wednesday delivered a healthy set of numbers in the second quarter (Q2) of 2020-21 (FY21). This exceeded Street expectation and was better than industry peers Tata Consultancy Services (TCS) and Wipro.

The company showed strong improvement across all financial parameters — revenue, net profit, and profitability were backed by all-round growth across key verticals and geographies. This prompted the Bengaluru-based company to guide for strong revenue growth in a seasonally weak third quarter and revise the margin guidance, apart from announcing a salary hike across the board with effect from the fourth quarter of FY21.

In the quarter ended September 30, the Bengaluru-headquartered company’s net profit jumped 20.5 per cent over the corresponding period in the previous financial year and 14.4 per cent over the preceding quarter to Rs 4,845 crore. The revenue at Rs 24,570 crore grew 8.6 per cent year-on-year (YoY) and 3.8 per cent on a sequential quarter basis in reported currency.

The profit and revenue growth figures of the Salil Parekh-led company were much higher than TCS and Wipro. For TCS, revenue grew 3 per cent YoY and 4.7 per cent quarter-on-quarter (QoQ), while net profit saw a rise of 20.3 per cent YoY and 4.9 per cent sequentially.

The biggest surprise for Infosys however, came from margin gain — a healthy 260-basis points (bps) improvement over the preceding quarter and 360 bps over the corresponding period in the previous financial year at 25.4 per cent. This narrowed the margin gap with industry leader TCS whose margin at the end of Q2 stood at 26.2 per cent.

The company was candid enough to attribute much of this gain to the cost-cutting measures it had initiated at the beginning of the year, including deferment of salary hikes, freeze on discretionary expenses like travel and brand expenses, gain from changes in onshore-offshore mix, and use of automation and subcontracting.

The company, however, said it might not be able to sustain the margin at the same level for the full year as it was expecting some headwinds in the second half once some of the deferred cost in terms of pay hikes and promotions start getting accounted. The company revised its margin guidance for the full year, from the earlier projected 21-23 per cent to 23-24 per cent. In terms of revenue for the financial year, the company said it was expecting it to grow between 2 per cent and 3 per cent, compared to the earlier projected 0-2 per cent growth in constant currency basis.

“Infosys’ FY21 guidance suggests that FY21 will be the second year in a row where it will outgrow TCS and narrow the margin gap,” equity research firm Emkay Global Financial Service said in a post-earnings note.

“I believe that some of the strategic investments we made, in terms of digital, driving localisation, reskilling, and improve focus on large client partnerships and deals, are resulting in where we are today,” said Salil Parekh, chief executive officer and managing director, Infosys.

“In fact, our recovery is much faster than what we see in the industry as a whole. We are among the few players with YoY growth in this environment and gaining market share, compared to what the industry is seeing,” he added.

In dollar terms, Infosys’ revenues at $3312 million grew 3.2 per cent YoY and 6.1 per cent sequentially. Net profit at $655 million saw an increase of 14.7 per cent over the corresponding quarter in the previous financial year, while on a QoQ basis, growth was 17 per cent. In fact, the company reported sequential growth in all the industry segments it operates in, while it was a positive for most verticals on a YoY basis.

“Infosys reported a healthy set of Q2FY21 numbers that were above our estimates — both on the revenue and profitability front,” said brokerage firm ICICI Direct Research in a post-earning note, adding, “The company’s revenue increased 4 per cent QoQ versus our estimate of 3.3 per cent in constant currency terms. The company’s dollar revenue increased 6.1 per cent versus our estimate of 4.7 per cent.”

In terms of geographies, growth was led by the Americas, Europe, and the rest of the world, which grew 4.7 per cent, 7.4 per cent, and 9.8 per cent, respectively on a QoQ basis. In terms of verticals, the banking, financial services and insurance saw QoQ growth of 7.8 per cent, while retail, high technology, and life science grew 10.6 per cent, 11 per cent, and 7.7 per cent, respectively.

The company’s digital revenue increased 12.9 per cent QoQ and 27.5 per cent YoY, accounting for 47.3 per cent of the overall revenue. “Digital accounts for 47 per cent of our business today. But the way it is growing, we are probably going to cross the 70-per cent mark (in the coming quarters). The journey will keep continuing,” added Parekh.

The company said even though the pipeline of large deals continues to be volatile, it is “very robust if you look at the annualised basis”.

During the quarter, Infosys signed large deals with a total contract value of $3150 million — an increase of over 80 per cent over the first quarter (Q1). In terms of pricing, the company said the pricing for digital deals continues to come at a higher premium, while there is pressure on the traditional business. It also said that pricing discount — which was higher in Q1FY21 — has moderated somewhat in this quarter.