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Deals Pipeline Encourages Infosys to Boost Sales Growth Forecast

Saritha Rai
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Deals Pipeline Encourages Infosys to Boost Sales Growth Forecast

(Bloomberg) -- Infosys Ltd., Asia’s second-largest software exporter by value, raised its sales forecast for the year ending March citing a “healthy pipeline” of orders.

Bangalore, India-based Infosys predicts revenue will expand as much as 9 percent from an earlier target of 8 percent. Chief Executive Officer Salil Parekh expects a revival in the company’s financial services business, and its ability to win large deals will help it boost its operating profit margin target to 24 percent, the company said as it reported earnings on Friday.

That upgrade clubs Infosys with companies such as Oracle Corp. and Adobe Inc. that raised sales forecasts, while helping its U.S.-listed shares post the biggest gain in more than a month as investors ignored the company’s first quarterly drop in profit in six quarters.

“Infosys delivered a strong positive surprise on revenue growth,” said Sudheer Guntupalli, a Mumbai-based technology analyst at Ambit Capital Pvt., who has a buy rating on the stock. “Strong large deal win momentum” seems to be driving the confidence behind this upgrade.

Shares Surge

The company’s American depository receipts surged 5.4 percent to $10.41, the biggest gain since Nov. 28. Its shares rose 0.6 percent to 683.5 rupees in Mumbai ahead of the results.

Infosys posted third-quarter profit that missed every analysts’ estimate. Net income fell 30 percent to 36.1 billion rupees ($512 million) in the three months ended Dec. 31, the first drop since March 2017, compared with the 41.3 billion rupee average of analysts’ estimates compiled by Bloomberg. The company reported sales of 214 billion rupees and it will buy back 82.6 billion rupees of stock, it said in a statement.

The company will repurchase shares at as much as 800 rupees. It will also pay 4 rupees a share as a special dividend.

"The aggression with which they are approaching the market stands as proof of their internal stability, that’s the one thing that stands out," said Ashish Chopra, senior group vice president at Mumbai-based Motilal Oswal Securities Ltd. "This time last year, they weren’t doing that because they were busy focusing inward."

Parekh, a year into the role, is trying to drive growth in digital services, re-skill staff and cater to changing client needs. He also faces the challenge of hiring more locals in key markets such as the U.S., where India’s outsourcing giants face a tightened visa regime under the Trump administration.

Room for Caution

Still, client caution and a weak environment in Europe, particularly among banks, will weigh on Infosys’s growth potential over the next 12 months, said Anurag Rana, a senior technology analyst at Bloomberg Intelligence.

Read Infosys’s earnings blog here

The December quarter is seasonally weaker for Infosys and its peers with a number of holidays reducing the amount of days they can bill clients. The year-earlier result included a $225 million gain from an agreement with U.S. tax authorities.

“The results show that revenue acceleration is the way forward,” said Harit Shah, an analyst with Reliance Securities Ltd. “The company has decided to offer a mix of share buyback and dividend. Investors though would have preferred a pure buyback. The stock is a buy."

Here are some of the highlights from the earnings:

Third-quarter total costs 170.2 billion rupeesTook additional depreciation, lowered value of SkavaSale of Panaya, Skava not to be completed by MarchOperating profit margin of 22.6 percent in the quarterSigned $1.5 billion of large deals

--With assistance from Nupur Acharya and Saloni Shukla.

To contact the reporter on this story: Saritha Rai in Bangalore at srai33@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Karthikeyan Sundaram, Jake Lloyd-Smith

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