Infosys Posts Disappointing Q4 FY15, shares slide 6%

When Infosys CEO& MD Vishal Sikka announced the company’s Q4 and FY 15 full year performance metrics out the company’s sprawling Chennai facility, the lack of excitement was palpable and after looking at the numbers one is forced to wonder, whether Infosys from a IT bellwether, is on the threshold of joining the league of crowded ‘also ran’ group of IT outsourcers?

While admitting on the disappointing performance Sikka is confident that the company will be back in top form as the fruits of transition kicks in the next 18 months or so.

Mute Q4 Numbers

Why is Q4 disappointing? For one it did not sum up to analysts forecasts and hence it impacted the shares to slide up to 6% by Friday. Just to give a gist of the numbers, revenues stood at Rs 13,411 crore for the quarter ended March 31, 2015 and growth was 4.2%. The sequential QoQ growth was just 2.8%.Net profit was Rs 3,097 crore for the quarter ended March 31 2015 YoY growth was 3.5%. For the full year FY 15 the company posted Rs 53,319 crore and a growth of 6.4%.

The markets and the analysts have reacted negatively to the sequential revenue growth from Q3 to Q4 - that was very muted. While company blames cross currency issues that pulled down it performance, but looking at from constant currency terms, Infosys posted a 0.4% decline, and while its competitors TCS, Wipro and HCL Technologies have reported growth in terms of constant currency.

Reflecting on the numbers, Sikka admitted its as not impressive, but went on to comment; “We see the industry going through a fundamental and structural transition. Despite being a challenging quarter, I am encouraged by the early successes in executing our ‘Renew-New strategy’, on a foundation of learning. Our focused employee engagement initiatives over the last few months have resulted in containing employee attrition to one of the lowest in recent times. And our investments in innovation and in renewing our capabilities are helping to elevate our client relationships, ” 
he added.

Perception & Reality

But FY15 being an year of turnaround and top management attritions and change of guard, one can term the full year performance of Infosys as rather good(notwithstanding analysts being very cynical) as the company has managed its initial transition pangs very well and the current CEO being the first non-founder to head the company.

Its interesting, that Infosys results are often dissected threadbare and probably this is one company that suffers from too much of perception and expectation. In the past the company has faced founders hangover and was too much polarised on Narayana Murthy. But now with an outsider as CEO, the company looks more independent and has more ability to innovate. This is one area that has been overlooked and most analyst sentiments are polarised on the raw numbers.

Clearly Sikka is putting in a larger long-term roadmap, and his aspirational target of making Infosys into a $20bn entity by 2020 looks ambitious and hinges on a whole lot of factors. Sikka said,” Its an aspiration target and nothing wrong in aspiring. We do not have a specific business plan for that, but we will strife to achieve that.”

Analysts are not very bullish about the aspirational target and are more concerned about the Q1 and Q2 of FY 16. With companies like Wipro giving a very muted outlook for next quarter indicates Q1 FY 16 a difficult quarter and that makes matters more challenging for Infosys.

The Infosys top management is bullish that FY 16 will see the company hitting the terra firma and creating new revenue streams out of the aggressive inorganic forays and investment on startups.

Despite all the cautious optimism, as an industry the IT outsourcing space will face severe headwinds in H1 FY 16 with core industries going through recessionary phases and that will have an adverse impact on the IT spending patterns.

In terms of outlook for FY 16, the revenues are expected to grow 10%-12% in constant currency terms and revenues are expected to grow 8.4%-10.4% in INR terms.