Sikka Effect: Infy Q2 net up 28.6%, but attrition stings

100 bps operating margins rise by 26.1%; FY '15 guidance at 7-9%

India’s second largest software exporter Infosys on Friday beat analyst estimates to report 28.6 per cent rise in consolidated net profit at Rs 3,096 for the second quarter of 2014-15 ended September 30  from Rs 2,407 crore in the corresponding period of the previous year.

Following the quarterly results announcement, the Infosys stock bucked the general trend and surged 6.68 per cent on smart Q2 earnings and after the global software major maintained its annual revenue guidance for fiscal 2015 at 7-9 per cent in dollar terms.

The company also announced a 1:1 bonus issue.  
Declaring the second quarter results, and the first since a non-founder took charge at the helm of the company, Infosys Chief Executive Officer and Managing Director Vishal Sikka said, “Digital transformation is reshaping the business of our clients. We see this as a great opportunity to help them renew the core of their business as well as expand into new frontiers and see early positive results."

A big surprise of the post-founder era came on the margins front with a 100 basis point sequential expansion in operating profit margins during Q2 at 26.1 per cent.
“Our strategy is to apply the same principles to our own business in order to capture this opportunity and accelerate our growth, within our culture of lifelong learning and purposeful work," he said.

On a quarter-on-quarter basis, net profit rose 7.3 per cent and revenues rose 4.5 per cent.Earnings during the quarter were mainly aided by an uptick in demand environment, coupled with the company’s cost rationalisation measures. The company along with its subsidiaries added 49 clients during Q2 on a gross basis.
Consolidated revenues rose 2.9 per cent to Rs 13,342 crore in the second quarter from Rs 12,965 in the corresponding period of the previous year.

Earnings during the quarter were mainly aided by uptick in demand environment, coupled with the company’s cost rationalisation measures. The company and its subsidiaries added 49 clients during Q2 on a gross basis and 14,255 employees in the same period, taking the total tally to 1,65,411 employees.

Revenues from the North America and Europe increased marginally to 60.8 per cent and 24.7 per cent respectively. But Infosys revenues from India came down to 2.2 per cent in the second quarter compared to 2.4 per cent.

The banking and financial services and insurance verticals topped in revenue generation with 32.8 per cent, manufacturing and retail & life science came second with 23.3 and 23.4 per cent respectively.

The company’s bonus share issue was termed as Sikka’s “gift for the Street”, and is viewed as an effort to increase liquidity and expand the company’s retail shareholder base.

“We have been able to improve our margins and feel confident of sustaining it within a narrow band. This gives us increased confidence to make the investments required to meet our growth aspirations," chief financial officer Rajiv Bansal said.

Record attrition rates, however, continued. It touched 20.1 per cent in Q2 of fiscal 2014 compared to 19.5 per cent in the same period last fiscal. But Sikka said that employee exits have been in the best interests of the organisation. "We have been witnessing a situation of most of them knocking our doors to rejoin. We are not worried over the development," he said.