Fair Value: Rs 3,700
Economic Moat: Narrow
Stewardship: Standard
Infosys reported second-quarter fiscal 2015 financial results on October 10, with Dr. Vishal Sikka, the company’s newly appointed CEO, outlining his strategic outlook for the firm.
We expect Sikka (who has been CEO roughly 70 days) to improve Infosys’ slow-moving legacy past, and early signs are promising, with revenue, margins, and attrition improving. Strategically, Sikka highlighted automation, artificial intelligence, or AI, and skilled human capital as critical success factors from which Infosys can drive higher productivity and deeper market relevance. While not a surprising anecdote from the new manager, the firm expects to supplement organic investments in automation and AI with mergers and acquisitions, while keeping the company’s relatively high attrition rate in check. We expect improved long-term revenue growth as a result.
After the introduction of several initiatives, month-to-month attrition rates have begun to fall, which is an encouraging sign. We maintain our fair value estimate and narrow economic moat rating.
We think Infosys remains highly relevant in the market even though Finacle (its core banking platform) experienced some weakness and point to seven significant wins in the quarter that totaled $600 million across various industries. Under new management, we think Infosys can return to its market-leading position and that the early signs are promising. Still, some execution risks remain as the firm looks reinvigorate growth and to shift to next-generation products and services. We think investors should look for a wider margin of safety before investing.
For the quarter and in reported terms, revenue rose 3.1% quarter over quarter and 6.5% year over year to $2.2 billion.
Europe was the strongest geography during the quarter, growing 6.5% to $544 million, quarter over quarter in constant currency, while energy, utilities, communications & services (ECS) was the best-performing industry segment, improving 8.8% quarter over quarter to $451 million, in constant currency. Despite volatile currency movements, Infosys reiterated its full-year revenue growth outlook of 7%-9%. The deal pipeline and decision cycles remained steady over the last three months, and overall pricing held steady, which is reassuring. Operating margins improved 100 basis points to 26.1% given better utilisation and rupee depreciation.
