After many misses, Infy is back in the reckoning

Last Updated: Sat, Jan 12, 2013 04:56 hrs

Infosys is back in the reckoning. After two years of many misses, Infosys on Friday beat the Street on almost every parameter in the third quarter results announced on Friday. India's second-largest Information Technology services company not only reported a 5.7 per cent quarter-on-quarter growth in its top line, well above the estimated two-three per cent; it also revised the revenue guidance forecast upwards.

Analysts said Infosys' outcome-based strategy was working not just for its clients but for the company, too, and it was set to exceed the five per cent revenue growth target for FY13. The third quarter has been a bumper one, as pricing is up 1.8 per cent and eight new large deals have been signed, which give revenue visibility of $731 million. While the market had been expecting a sequential revenue growth of two per cent, Infosys has grown organic revenues by 4.2 per cent.

Analysts are trying to see if this growth is sustainable. Infosys MD & CEO S D Shibulal said the company had grown despite unfavourable macroeconomic conditions. "The early indications of the IT spend budgets seem to be flat or may decline. We will get a better picture only towards February-end," he explained.

The risks are, however, not over. A look at the top clients shows Infosys still needs to get its act in place. Revenue from top clients is down to 3.6 per cent this quarter from four per cent last quarter; from the top five clients, it is down 14.6 per cent, against 16 per cent; and from the top 10 clients, it is at 23.9 per cent, down from 25.4 per cent, sequentially. Besides, volume was up only 1.5 per cent, with a flat year-on-year profit, indicating absence of margin expansion. The management has conveyed the company has performed better, as many deals signed in the second quarter have begun to pay.

But the overall performance had many converts as well. Some analysts who were sceptical until last night were frantically calling clients with new estimates and price targets. CLSA, which had written a nasty open letter to Shibulal a few months earlier, on Friday said: "Expect the stock to continue its up-move even after on Friday's rally. The stock is likely to touch Rs 2,900 levels in the next 9-12 months. Investors are likely to shift some IT weight from TCS to Infosys." Clearly, the company's founder Narayana Murthy's credo of understating expectations and over-delivering in reality is back.

No surprise, therefore, that the firm's stock price reported the highest-ever single-day gain.

The Infosys management has called the sudden surge in numbers a "strategy coming into force". Flexibility in pricing to structure deals and aggression in sales and marketing efforts were an obvious key to its growth story. The firm has also conveyed it is taking initiatives to change the client perception of being relatively rigid in negotiations.

It is aggressively going after segments that are still seeing growth. For instance, its share in the overall infrastructure management services pie has gone up over the last quarter. Besides, the company has expanded its footprint across service verticals and geographies. Europe, the company said, was showing signs of "security".

"Infosys results are finally coming closer to reflecting the demand reality and if this sustains for the next two quarters, it could indicate the worst phase of the company is behind it," said Partha Iyengar, country manager (research), Gartner India.

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