Mumbai: Infosys Ltd’s American Depository Receipts (ADRs) have fallen 4.85% in pre-market trading on the New York Stock Exchange. Investors are evidently unhappy with the company’s June quarter results announcement.
On the face of it, things seem steady, with the company maintaining both its revenue and profit margin guidance for the year. But underneath the surface, it is a different story.
Revenues grew by only 6% year-on-year in constant currency terms last quarter, lower than the 6.4% growth reported in the March quarter. Remember that nearly all IT stocks have risen this year on the hope of acceleration in growth. Infosys’ numbers aren’t supporting the theory yet. What’s more, the key financial services vertical reported a marginal drop in revenues sequentially. So although the company sounded gung-ho about the prospects for this segment based on deal flow, it doesn’t yet have the numbers to back up its optimism.
In contrast, Tata Consultancy Services Ltd reported an over 200 basis points improvement in growth rate last quarter vis-a-vis the March quarter. And the financial services sector, which grew 3.7% sequentially, had a good deal to do with this. As things stand, TCS’s growth this year could be 3-4 percentage points higher compared to Infosys. The gap between the two companies is now widening, after having narrowed when Vishal Sikka was at the helm at Infosys.
Infosys’s outlook for margins is a bit of a worry, too. In March, when the rupee was at a little over 65 to a dollar, it had guided for margins of between 22% and 24% for the financial year ending March 2019. Since then, the rupee has depreciated about 5%; but the company has maintained its guidance. For some analysts, this is a worry as far as earnings projections for the year go. In fact, this was another reason IT stocks have rallied lately – that the depreciation in the rupee would boost profits. Again, this thesis isn’t supported by Infosys’ guidance.
Another worry is the simultaneous rise in both employee utilisation and attrition. Of course, higher attrition can result in higher utilisation rates; but one would expect companies to fill vacancies so as to tap growth opportunities in the future. With employee utilisation at 85.7% excluding trainees, the company doesn’t seem to have much of a buffer if there are unexpected growth opportunities. It is either unexcited about growth prospects, or worse still, is blindsided about growth opportunities. Either way, the messaging is poor as far as investors are concerned.