Planning to buy Infosys? Restructuring benefits likely to trickle in next 3 years

Infosys on Tuesday reported fourth-quarter numbers which were largely in line with estimates.

The IT firm saw slight improvement in operating margin and announced higher dividend for the final quarter of FY14.

In the past several quarters, the company has been finding it difficult to grow revenue consistently as rising competition to bag large transformational projects has intensified amid restructuring. The IT major lost one client in the $200 million bucket and two in the $100 million bucket.

Vikas Khemani, CEO, Edelweiss Securities is of the view that as a house view we think that the management will turn around things for Infosys from hereon but investors should wait for better entry points from a technical point of view but if you have to take a structural call, we are positive on the company.
“We think that given the fact that now from here until next quarter there would not be any major triggers as far as company specific thing is concerned and given the fact that there might be some sort of appreciation in the rupee there could be better entry points in Infosys,” he added.

The management opined that the global economic environment has improved and looks exciting for IT services industry. The company has still got headroom to increase its utilization level by 300 bps to be comparable with peers and this, in turn, will assist in increasing operating margins further.

“We see business opportunities both in the Europe, US and other parts including Australia. The volume pick up quarterly will give us the momentum toward revenues as we see today with respect to the pipeline we have, with respect to the decision making cycles and our resources including the utilisation level this is what it is at this point in time,” said Infosys Management- BG Srinivas, President.

“If you look at the utilisation in the last couple of quarters, yes it has definitely improved, today it stands at around 76% and we can continue to improvise on that and we can take it to 80% as the volume picks up for sure,” he added.

The company signed 4 large deals during the quarter with TCV worth US$700mn+. Infosys’ EBIT margin grew by 45 bps QoQ to 25.5 per cent (better than expectations), led by operational efficiency with inch up in utilization level to 74.4 per cent and sequential decline in employee costs.

The management opined that the global economic environment has improved and a company like Infosys is system driven with a healthy management bandwidth and hence the impact will not be long lasting.