by Suhani Adilabadkar

Infosys delivered a strong performance in the September quarter FY21, which beat street estimates and enthused investors by raising its guidance for FY21. Margin expansion, revenue growth, large deal wins, strong FCF generation, rising digital revenues, low attrition rate, Q2 FY21, was a broad-based gratifying package deal for both investors and analysts.

Infy, the original bell-weather of Indian IT sector, still has fire in its belly despite losing its top spot to TCS in the early 2000s, and looks ready to take advantage of a gradually improving demand environment and higher IT spend on automation, cloud migration and accelerated digital transformation. The stock has gained 23% over the past three months. (See Infosys' buy/sell zone)

Quick Takes

• Revenues exhibited strong growth momentum, rising 8.6% YoY and 4% sequentially, reported at Rs. 24,570 crore in Q2 FY21.
• Operating margin stood at 25.4%, expanding by 370 bps YoY and PAT rising 20% YOY in Q2 FY21.
• Large deal wins was the highest ever at $ 3.15 bn - Infy won 16 large deals and added 96 new clients in Q2 FY21.
• Digital revenues grew 25% YoY constituting 47.3% of total revenue basket.
• Additionally for Infosys, the days of turbulent management soap operas seem to be over. Infosys looks to be in firm hands since Mr. Salil Parekh joined as CEO and MD in 2018.
• Factoring all the growth drivers, management has raised its FY21 guidance to 2-3% in constant currency from the previously announced 0%-2% and margin guidance from 21% -23% to 23%-24%.  

September Quarter FY21 was solid, but road ahead?

Infosys reported solid Q2 FY21, beating street estimates on all significant parameters. Revenues exhibited strong growth momentum, rising 8.6% YoY and 4% sequentially reported at Rs. 24,570 crore in Q2 FY21 against Rs. 22,629 crore same period previous year.

In dollar terms, revenues came out at $3,312 in the September quarter FY21 growing 3.2% YoY with operating margin at 25.4%, expanding phenomenally by 370 bps YoY, driven by 80 bps improvement in utilization, 80bps through onsite-offshore mix and 100 bps through increase in RPP (revenue per person) in Q2 FY21 compared to 21.7% in the corresponding quarter previous year.

Aided by strong margin expansion and revenue growth, PAT registered a 20% YoY jump and 14% sequentially, reporting at Rs. 4858 crore in September quarter FY21. Commenting on strong Q2 numbers, Mr. Pravin Rao, COO, Infosys said, “Growth accelerated during the quarter as economies across the world started opening up gradually and clients focused on technology to help overcome the impediments. As we continue to wade through the continuing complexities posed by the pandemic, our rock-solid focus on client relevance and employee wellbeing is helping us navigate this challenge successfully”.

Navigating through Covid

Covid has turned into a tailwind for the Indian IT sector, saving costs, expanding margins and loosening purse strings of clients as they pursue their digital transformation initiatives in order to build process resilience, improve cost efficiency and resolve supply chain issues.

Additionally for Infosys, the days of turbulent management soap operas seem to be over. Infosys looks to be in firm hands since Mr. Salil Parekh joined as CEO and MD in 2018. FY2018-19 was earmarked as the stabilization year, the next fiscal for growth and FY20-21 for stepping on the growth accelerator.

And though FY21 is ridden with Covid uncertainty, the company is reporting better growth than its peer group, in fact the best in the top quartile.

Starting with vertical performance, hi-tech (9% revenues) topped the chart growing 24% YoY followed by life-sciences (6.8% revenues) rising 9% YoY, financial services (32%) jumped 4% YoY, manufacturing (9%) and energy segment (12%) declined 7% and 3% YoY respectively while retail (15%) and communications (12.6%) ended flat in Q2 FY21. As per the management, inspite of pressure on spending, Infy has a strong deal pipeline in both communications and energy, while manufacturing recovered strongly after witnessing massive sequential decline in Q1 FY21. The management expects gradual improvement in manufacturing with recovery in volumes and robust new account openings. BFSI segment also continued with its improvement as banks invest in mortgage servicing, call center technology and operations lending services to cater to various government relief programs post Covid.

And with respect to retail, management bears, a cautious stance due to continuing demand and liquidity issues and possibly increased furloughs in the coming months. Coming to geographic revenue segmentation, North America (60% revenues), Europe (24%), India (3%) and ROW (12%) grew 2%, 4%, 16% and 4.5% YoY respectively in Q2 FY21.

Narrowing the Gap with TCS

Infosys has been outshining the industry benchmark TCS over the past three quarters. In fact, H1 FY21 revenue growth for Infosys has been 8.5% YoY whereas TCS reported a mere 1.7% jump.

Coming to dollar revenues, Infy delivered a stable performance over the past one year. In the past two quarters, while TCS entered negative territory in June and September quarter FY21 exhibiting de-growth of 7.8% and 3.2% YoY respectively, Infosys was resilient with flattish dollar revenues in June and 3.2% growth in Q2 FY21.

Operating margin gap too has also narrowed, as Infy witnessed a 430-bps expansion from March quarter FY20 while TCS was behind, with 110 bps rise. In Q2 FY21, margins for Infy and TCS stood at 25.4% and 26.2% against, 22.7% and 23.6% respectively in June quarter FY21.

While the analyst community is gung-ho about Infy’s strong margin expansion over the past three quarters, the management alluded that sustainability would be a tough job over the next few quarters. In this respect, Mr. Nilanjan Roy, CFO, Infosys, clarified, “As some of the margin improvement had risen from the cost deferrals etc., we expect some of these benefits to shrink in H2, as we roll out promotions and salary hikes for employees, commence hiring across the organization, with higher travel and overhead costs. All this will consequently impact H2 margins”. But impact on margins will be across the board as discretionary expenditure, travel costs and salary hikes return in the next few quarters.

Strong Growth Trajectory = Robust Order Book + Digital Growth

For Infosys, there have been a host of key positives in the September quarter FY21 - the utilization rate after dipping to 81.2% in Q1 FY21, has improved 240 bps sequentially and attrition rate has been at multiyear low of 7.8%. Large deal wins were the highest ever at $3.15 bn and Infy won 16 large deals and added 96 new clients in Q2 FY21. Speaking on a robust order book, Mr. Roy said, “We did last year $2.8 bn in Q2, this year $3.1bn in Q2, but the big difference is, last year we had only 11% of net new deals in the figure. We are now at 86%. So, the quality of the order book has dramatically improved”.

And lastly digital business, almost $6 bn for Infy, accounts for almost half of its total revenues. While TCS has stopped disclosing digital revenues, Infosys digital revenues have been growing in strong double digits. In September quarter FY21, digital revenues grew 27% YoY constituting 47.3% of total revenue basket. Factoring all the growth drivers, management has raised its FY21 guidance to 2-3% in constant currency from the previously announced 0%-2% and margin guidance from 21% -23% to 23%-24%.  

Post Covid, Infy has exhibited strong demand traction and is ahead of its peer group on multiple counts, mainly driven by its proven business model, focus on ensuring client service delivery, superior technology infrastructure and digital capabilities and strong localization (63%) push in US to navigate regulatory challenges. Though Infy seems to have been moving forward with rejuvenated vigour to catch up with Industry leader TCS which has double its bottom-line and market cap, it has some way to go. So far it's making good strides.