Infy Gains On Strong Revenue Guidance

India’s second largest IT company Infosys' stock has gone up by more than 4% after the announcements of its results for the second quarter of FY14, where the company managed to beat the street expectations in its topline. However, the company has posted a consistent decline in its operating margin for sixth quarters now. The stock has appreciated by more than 30% over the past 3 months.

The topline saw a sequential growth of 3.8% in dollar terms during the quarter. In rupee terms, this was 15.1% higher due to the rupee depreciation seen during this quarter. However, Infosys’ operating profit dipped by 4.4% in the quarter against that in Q1 in dollar terms. Further, its net income dropped by 11.1% in dollar terms. The rupee depreciation helped the operating and net profits come in 9.2% and 1.6% higher in rupee terms.

Previously, Infosys has been criticised for its preference for margins over growth. The latest numbers clearly show the effects of strategy relaxation in the company’s sales and pricing policy for the last one year. This is coupled with the overall revival in demand for outsourcing services, especially from the North American market, which contribute more than 61% to the topline.

On the other hand, the lower operating margins seen continuously for the past 6 quarters have a negative impact on its pursuit for revenue growth. The operating margin dipped to 21.88% during the June 2013 quarter against 34.71% in last year same period. However, we are confident that with its long experience of running the IT business, Infosys' management has the requisite skills to reverse the declining trend.

Further, there are certain other concerns looming. The company's attrition rate rose to 17.3% during the September 2013 quarter from 16.9% a quarter ago and 15% in the same period last year. Interestingly, this rise is despite the recent salary hikes. Further, the company is under scrutiny by the US government with regard to the compliance with visa rules. It has made provisions of USD 354 million for the same, which also contributed to bringing down this quarter's operating profit.

Shrugging off all these negatives, the company's management has revised its lower cap of revenue guidance from 6%-10% in the first quarter to 9%-10% in this quarter in dollar terms. The narrowing of the guidance range hints at the company's level of confidence over the improving market conditions for the IT business. It also shows that the downside for its business in considerably lower in the coming future. The company revised its rupee revenue guidance to 21%-22% for FY14 from 13%-17% earlier.

Another major positive for the company is the number of clients added during this quarter. It was able to add 68 clients to its list in this period, which is the highest for the company in the recent past. This is clearly shows the improvement in customers' confidence in the company post Narayan Murthy's return after the recent potential loss of customers due to ongoing management churn.

On the diversification front too, the company managed a slight improvement in terms of both geographic and industry segments. In the first half of the year, its European revenues increased by over 2% while the North American revenues decreased by 2% in its topline pie. Industry segment-wise, the company's manufacturing business grew by 6.8% sequentially and 6.6% in constant currency terms during this quarter. We expect that the company's dependancy on North America and BFSI will reduce over the coming quarter, which will help to mitigate the risk associated with its stock.