Infosys: Operational initiatives alleviate headwinds

Equity analyst Andrew Lange takes a look at the latest quarterly results.
By Morningstar Analysts |  20-10-16 | 
 

Infosys reported solid second-quarter results, but for the second time in as many quarters, the company lowered its full-year revenue guidance.

In a similar vein to TCS’ recent results, Infosys is seeing cautious discretionary spending from clients. As a result, Infosys lowered its full-year revenue growth forecast to 8.0%-9.0% in constant currency from 10.5%-12.0%.

Management commentary around pricing pressure in traditional services such as business process outsourcing (BPO) also served as a long-term warning that IT service vendors need to be investing in and growing their digital and cloud practices to counter growth and margin pressure. To that end, Infosys has been hard at work reeducating its workforce on Digital Thinking initiatives while aiming to leverage artificial intelligence (AI) and automation to help with efficiency and productivity.

For the second quarter, Infosys estimates that it saved 2,387 employees worth of effort through AI and automation. We have lowered our full-year revenue outlook in alignment with the company’s guidance, however, our fair value estimate remains unchanged at RS 1,177.

We reiterate our narrow economic moat rating and believe the firm is moderately undervalued at these levels.

For the quarter, revenue increased 8.2% year over year to $2.59 billion (rose 8.9% in constant currency). Application development, infrastructure management, and product and engineering all grew above the company’s average during the quarter.

Meanwhile, consulting continued its soft performance from the first quarter and management remains focused on managing this key relationship building business. With revenue headwinds facing the company, management has placed an emphasis on operational efficiency. Better utilization, on-site mix, and cost optimization helped improve operating margins by 80 basis points over the previous quarter to 24.9%.

We continue to forecast healthy operating margins in the 24%-26% range.

  • Fair Value: Rs 1,177.00
  • Uncertainty: Medium
  • Economic Moat: Narrow
  • Moat Trend: Stable
  • Stewardship: Standard

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