Under Vishal Sikka, Infosys Ltd’s recovery started in earnest in financial year 2014-15. Growth rose from single-digit levels to the mid-teens in FY16; but things have deteriorated considerably since then.
In the March 2017 quarter, volume growth fell to 7.7%, down from 15.4% a year ago.
Growth rates are back to where they were before Sikka joined the company.
Last quarter’s revenues of $2.569 billion also fell short of the Street’s estimate of fourth quarter revenue of $2.584 billion. Worse still, there are no signs of things improving anytime soon. The company has forecast revenue growth of between 6.5% and 8.5% in constant currency terms in fiscal 2017-18. Assuming growth falls in the middle of this range, it would be no better than the lows of the March 2017 quarter.
A moot question is if the drop in growth rates is temporary and whether growth will pick up when things turn around for the industry. Analysts at Kotak Institutional Equities say in a recent note to clients, “Infosys is gaining share in large deals and wallets of large clients, and is positioned well to capture discretionary spends. Near-term volatility and risks pertaining to potential tightening of H-1B rules aside, Infosys is making right investments in automation and digital for sustained profitable growth over the next few years.”
Also, to be fair, industry growth rates have declined in the past few quarters, and it may be argued that Infosys is being dragged down by the challenges the entire industry is facing.
But not everyone is convinced. The recent underperformance in Infosys shares shows that investors are increasingly questioning the company’s prospects.
Also, it’s clear that the days of outperformance (in FY16) are a thing of the past.
And while the company laboured to highlight an improvement in employee utilisation and its ability to restrict a slide in margins last year, analysts are disappointed with the margin guidance of 23-25% for the next year.
Also read: Infosys CEO Vishal Sikka says will have to ‘live with’ H1B visa policy
The rupee has appreciated in recent months, besides which H1B scare created by the Trump administration can lead to higher costs in onsite services. While investors had an inkling that maintaining margins at around 25% will be a challenge in this backdrop, the lower end of the target range (23%) has come as a disappointment.
With growth stuttering and margins on shaky ground, Infosys has tried to soothe investors’ nerves by deciding on a new capital allocation policy. It will pay out $2 billion from its existing cash hoard of around $6 billion, which is slightly higher than the Street’s expectation of a Rs10,000 crore payout. It also said it will pay out 70% of annual free cash flow (cash flow from operations less capital expenditure) annually, compared to the earlier policy of paying out 50% of net profits. But this won’t change annual payouts materially, as its free cash flow is far lower than reported profits.
All told, the March quarter results provide little reason to get excited for Infosys investors. The company’s shares have fallen only around 2.25% post results, but that’s largely because they were already underperforming peers as well as the broad market year-till-date.
