Infosys reported a strong start to fiscal 2016. Sequential revenue and volume growth were the highest in 15 and 19 quarters, respectively. Though it is still early, we think management’s focus on changing Infosys into a deeply client-centric organization that solves next-generation service requirements is starting to resonate with new and existing customers.
This can be highlighted by six large deals signed during the first quarter, two clients moving into the $200 million range, and Infosys’ largest client moving into the $300 million bucket.
Platforms and products such as the Infosys Information Platform, EdgeVerve, and Finacle continue to show good demand as clients seek to cut costs, improve processes, increase time-to-market, and gain better analytical insights.
Given the positive start to the year, management increased the midpoint of its USD revenue growth guidance to 8.2% from 7.2%. We have adjusted our financial model accordingly but maintain our $16.55 fair value estimate and reiterate our narrow economic moat rating. We've raised our INR fair value to Rs 1,062 based on an updated INR/USD exchange rate. With the company now trading slightly above our fair value estimate, we would recommend a wider margin of safety before committing capital.
For the quarter, revenue rose 5.7% to $2.26 billion year over year (increased 10.9% in constant-currency terms). Better execution during the quarter was a primary driver for the company. A recently realigned senior management team, combined with a redesigned request for proposal process, helped the company attract 79 gross clients. We think the firm’s commitment to Design Thinking (next-generation thinking) will help it make the transition from traditional headcount-led services to the next era of digital-led outsourcing (or Outsourcing 2.0). Already, Infosys has trained more than 39,000 employees in Design Thinking, which sits it in good stead for the future.
The company’s operating margin fell 170 basis points to 24% year over year as wage hikes and higher visa costs weighed on the firm. Still, we expect operating margins to remain in the mid-20s for the foreseeable future and think nonlinear digital revenue will help negate other rising costs.
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