This Article is From Oct 15, 2013

Infosys: 10 reasons why analysts are betting on the stock again

Infosys: 10 reasons why analysts are betting on the stock again
Infosys shares jumped as much as 7.5 per cent after the IT major announced strong sales growth in the second quarter ending September 2013. After a strong start, Infosys shares closed 4.8 per cent higher and did not display the volatility normally associated with the stock on earnings day. This is the second successive quarter, when Infosys has reported good numbers, leading some analysts to say that "the worst might be over" for India's second biggest outsourcer.

Here's all that you need to know about Infosys Q2

  1. Murthy's presence calming stock volatility: The results were the first for a full quarter since Narayana Murthy came out of retirement on June 1. Mr Murthy's presence has helped calm sentiments, analysts said. The stock swung between 15-20 per cent over the previous three quarterly announcements. "I'm sure Murthy is spending a lot of energy in sort of assuring clients that Infosys means business," Bhavin Shah, CEO of Equirus Securities told Reuters. (Track stock)

  2. Guidance raised: Infosys narrowed its sales outlook for fiscal 2013-14 from 6-10 per cent to 9-10 per cent indicating rising confidence. The current guidance, however, implies that Infosys will grow slower than the IT industry, which is estimated to grow at 12-14 per cent. SD Shibulal, chief executive of Infosys said the annual guidance was a statement of fact. The third quarter sees holidays and furloughs, while clients finalize their budgets in the fourth quarter, Mr Shibulal told reporters. Infosys' retail and CPG (consumer packaged goods) vertical has seen some weakness, Mr Shibulal said, holding the company from raising the upper end of the guidance. (Why Infosys didn't raise its annual guidance)

  3. Infosys being "conservative": Several analysts said the conservative revenue guidance was set after a series of misses over the last eight quarters. Some said they expect revenue to exceed the current guidance for the full year. "Infosys is back to its days of under-promising and over-delivering," Manik Taneja, an analyst at Emkay Global Financial Services told Reuters.

  4. Profits flat on one-time hit: Infosys' Q2 net profit rose a modest 1.6 per cent year-on-year to Rs 2,407 crore, but missed estimates as the company made a provision of Rs 219 crore for "visa related matters." Infosys has been under investigation in the US, its biggest market, over the past use of temporary employment (B1) visas and the company said it had made the provision based on discussions with US government agencies.

  5. Sales top estimates: Infosys' consolidated revenue for the September quarter was Rs 12,965 crore, higher than estimates of Rs 12,800 crore. Q2 sales were up 32 per cent from a year earlier and 15 per cent from the June quarter. The strong sales indicate that Infosys' renewed focus on "bread and butter" IT outsourcing contracts is paying dividends.

  6. Dollar revenues surprise: Infosys said Q2 sales in US dollar terms rose 3.8 per cent to $ 2066 million, higher than expectations of $2042 million. This is the first time that Infosys topped $2 billion in quarterly sales. Rising dollar revenues indicate deal wins, client traction and revenue momentum.

  7. Operating margin hit on higher wages: EBIT margins dropped 170 basis points sequentially to 21.9 per cent in the September quarter despite sharp fall in the rupee. Rajiv Bansal, chief financial officer of Infosys, told reported that wage hike in the September quarter offset benefits of rupee depreciation and barring the charge related to visa use, margins would have stayed at June quarter levels of 23.6 per cent. Wage hike impacted margins by 300 basis points, Mr Bansal said.

  8. Profits being re-invested: Mr Bansal said told reporters that Infosys is ploughing back any benefit from growth, improvement in operational parameter and rupee benefit back into business. This quarter, we revised our compensation, Mr Bansal said, adding that Infosys is investing heavily in its sales engine and on tools to boost productivity to "sustain the kind of growth we want to continue".

  9. Volumes, pricing improve: Mr Shibulal said Q2 volumes rose 3.1 per cent q-o-q, slightly lower than 3.4 per cent qo-q growth in the June quarter, but pricing (in reported currency) improved 0.6 per cent q-o-q against a price decline in the June quarter. Infosys added 37 new clients in Q2. Five of them were US Fortune 500 companies. Infosys won five large wins in Q2 ($50 million plus multi-year deals), Mr Shibulal added.

  10. Utilization picks up: Infosys said during the July-September quarter employee utilization rate (workforce efficiency) was higher at 77.8 per cent as against 75.9 per cent in the June quarter. Infosys saw a net addition of 2,964 employees during the period thought attrition rate was higher at 17.3 per cent in Q2.

(With inputs from Reuters)