by Suhani Adilabadkar
Infosys delivered strong broad-based growth in the June quarter of FY21, along with positive management commentary. The stock's share price soared 15% the day after the Q1 FY21 results came out, as the second largest Indian software company reported better than expected June results compared to its closest rival TCS.
In the case of Infosys, it is often hard to separate the legend from current performance. It is the first Indian company listed on NASDAQ, and which created India’s first salaried millionaires through its employee stock options program. Established in 1981 and completing its 39 year long journey, Infosys has been a major contributor to India's emergence as the global destination for software services talent. Infy’s stock price has gained more than 40% over the past three months.
Revenue was in high single digits, 8% YoY growth in Q1 FY21 at Rs. 23,665 crore, operating revenues jumped 20% and PAT grew 12% YoY.
Digital revenues grew at 25.5% YoY in constant currency and account for about 44.5% of revenues.
Infosys signed the Vanguard deal, the largest ever signed in Infosys’ history. It closed in July and is touted to be around $1-1.5 bn.
Infosys has enhanced its remote work enablement from 93% in March quarter FY20 to almost 99% of its employees in June quarter FY21.
Speaking on its June quarter performance, Mr. Salil Parekh, said, “We have had an exceptionally good quarter in our first quarter of this financial year. The results for Q1 were strong across multiple dimensions - revenues, continued differentiation in our digital offerings, large deal wins, operating margins, collections & cash flows and reduction in employee attrition”.
BFSI contributed 31% revenues followed by retail with 14% contribution de-growing 1.3% YoY impacted by Covid upheaval as non-grocery, apparels, lifestyle & fashion, restaurants, logistics segments witnessed demand contraction and supply chain disruptions.
A better than expected June Quarter FY21
The street was enthused by Infy’s ‘better than expected’ performance especially in the covid hit scenario. Revenue was in high single digits, 8.5% YoY growth in Q1 FY21 reported at Rs. 23,665 crore compared to Rs. 21,803 crore in the same period last year. Dollar revenues were almost flat at $ 3121 in June quarter FY21.
Europe grew by 4.4% YoY in constant currency while North America was flattish. Operating profit for June quarter FY21 stood at Rs. 5317 crore compared to Rs. 4431 crore in the corresponding quarter of the previous year, rising 20% YoY. Operating margin expanded 220 bps reported at 22.5% in Q1 FY21 against 20.3% same period previous year. Net profit or PAT grew in double digits, from Rs. 3802 crore in June quarter FY20 to Rs. 4272 crore, rising 12% YoY. Infosys has enhanced its remote work enablement from 93% in March quarter FY20 to almost 99% of its employees in June quarter FY21. Speaking on its June quarter performance, Mr. Salil Parekh, said, “We have had an exceptionally good quarter in our first quarter of this financial year. The results for Q1 were strong across multiple dimensions - revenues, continued differentiation in our digital offerings, large deal wins, operating margins, collections & cash flows and reduction in employee attrition”.
Infosys is taking Covid Head On
In the March quarter FY20, Infosys had reported Covid impact of $ 32 million on revenues and 90 bps on margins.
Revenues came out at 8% YoY growth, margins dipped 40 bps YoY and PAT moved 6% north YoY in Q4 FY20. On the whole it had delivered a stable and sombre performance in the last quarter of FY20.
The June quarter seems to have enhanced Infy’s covid learning curve in a short period of three months exuding confidence and optimism. Apart from a positive stance by the Infy management, the street was impressed by a strong June performance along with the resumption of guidance by the original IT bellwether.
Even with Covid bringing uncertainty in every field, sphere and geography, the Indian IT sector seems to be resilient so far. Infosys, close on TCS’ heels, has exhibited both agility and resilience, evident from its robust vertical performance.
Starting with BFSI, growth was reported at 9% YoY and though there was an initial decline in the early part of Q1, faster recovery in business volumes and deals was witnessed during the quarter, especially in U.S. and APAC banking.
BFSI contributed 31% revenues followed by retail with 14% contribution de-growing 1.3% YoY impacted by Covid upheaval as non-grocery, apparels, lifestyle & fashion, restaurants, logistics segments witnessed demand contraction and supply chain disruptions. In communications, growth was stable at 5% YoY, though clients, especially in the media & entertainment industry are under pressure due to weaker advertisement spend and cancellation of events putting in 13% in revenue basket. Energy segment with similar revenue contribution expanded 7% YoY. Manufacturing also moving on the plane, grew 7% YoY contributing 10% revenues, even as production and supply chain disruptions continue. Life science performed robustly with 17% YoY growth and star performer Hi-tech vertical jumped 23% YoY providing 7% and 9% respectively to the total revenue mix.
Analysts are happy with Infy’s performance, terming it as resilient amidst the pandemic, and are impressed by its digital business growth. In this respect, Mr Parekh said, “We think there is a set of resilience, which comes from a lot of spend which is geared towards companies executing more digital work, more cloud work, more work on cyber and data. And those are the sort of things that looked positive as the quarter progressed”.
Digital revenues grew at 25.5% YoY in constant currency and account for about 44.5% of revenues. The company aims to touch 50% digital proportion evolving itself into a digital company in the near future. Growth is expected to spur as clients reinvent their business models, building flexible supply chains, higher automation and e-commerce bandwidth amidst Covid uncertainty.
Another positive factor is that the robust supply of deals continued during the quarter with 15 large deal wins of $ 1.74 bn in Q1 FY21, amounting to five deals in financial services, three deals each in retail, energy utilities and hi-tech; and one deal in manufacturing.
With respect to geographic segregation, 13 deals were from the Americas and two from Europe. The company also boasts strong cash and liquidity position amidst this pandemic as free cash flow (FCF) stood at $728 mn rising 50% YoY at a record high, aided by strong collections despite client extension requests, government tax deferrals and tight capex control. Another advantage which Infosys enjoys vis-à-vis its peer group due to its high investment in localization in US and Europe markets put in place a few years back, bearing fruit as the company is in a better position to manage travel restrictions and upcoming visa changes.
The analyst community has cheered Infosys’s robust deal pipeline, strong margins, high growth in digital revenues, strong liquidity position amidst Covid landscape and positive localization factor. The resumption of its annual guidance, revenue growth between 0% to 2% YoY in constant currency and operating margin guidance for the full year at 21% to 23% has given confidence to both investors and analysts alike.
Another positive is the recently signed deal with Vanguard, one of the world’s largest investment management companies, the largest ever signed in Infosys’ history closed in the month of July, is touted to be around $ 1-1.5 bn. Infosys in the third year of its transformative roadmap initiated in FY18-19, is right on track, accelerating growth, as per its June numbers. Hopefully it will manage to keep up the speed despite the pandemic.