infosys' profit margins continue to slide

An analysis I did on Infosys' long-term trend in profitability in today's edition of FC (http://www.mydigitalfc.com/companies/profit-margins-sliding-q3-622)

Infosys results: profit margins continue to slide down 

Infosys may have beat the market expectations by a decent margin when it announced its December 2015 quarter results, but a long-term analysis of the sequential dollar revenue growth in the last nine quarters reveals that it was far from being its best performance.

Our long-term analysis, based on Bloomberg data of Infosys’ consolidated financials in dollar terms, showed that the dollar revenues of Infoys in the latest quarter (third of financial year 2015-16) grew by just 0.2 per cent to $2,410 million in Q3 FY16 as compared to the previous quarter (Q2 FY16).

This is only the seventh best sequential dollar revenue growth which Infosys has recorded in the last nine quarters from Q3 FY14 to Q3 FY16. It was better compared to only Q4 FY14 and Q4 FY15 when the information technology major posted negative growth rates (see chart).

Infosys: long-term quarterly growth in dollar revenues
	Sales ($ million)	QoQ % change
Q3 FY14	2,101	0.5
Q4 FY14	2,085	-0.8
Q1 FY15	2,136	2.5
Q2 FY15	2,202	3.1
Q3 FY15	2,226	1.1
Q4 FY15	2,155	-3.2
Q1 FY16	2,263	5.0
Q2 FY16	2,407	6.4
Q3 FY16	2,413	0.2
Source: Bloomberg. Analysed by FCRB.

As per the financial statements disclosed by Infosys on Thursday, the sequential growth in consolidatated reported dollar revenues in Q3 FY16 was 0.6 per cent. The disclosed  statement covered the last five quarters and the 0.6 per cent growth rate in the latest quarter was the second lowest.

Research analysts at B&K Securities, in a flash research note on Infosys on Thursday after the latest quarter results were announced, said Infosys’ Q3 FY16 “revenue growth stood better than our and street expectations but growth was led by India revenues which always remain volatile. Growth from US as well as IMS was muted.”

The consolidated operating profit margin (ratio of profit before interest, depreciation and tax) in Q3 FY16 was 24.9 per cent with the operating profit being Rs 3,959 crore against revenues of Rs 15,902 crore. This 24.9 per cent operating profit margin (OPM) was the lowest in the last nine quarters, data from the Capitaline database showed in our analysis.

The highest OPM was in Q3 FY15 when it was 32.8 per cent. So, from the December 2014 quarter to the December 2015 quarter, Infosys’ OPM went from the highest to the lowest, as far as the period of the last nine quarters is concerned. In Q2 FY16 the OPM was 30.6 per cent.

Thus, sequentially, the margin fell by around 60 basis points. A post results research update by HDFC Securities on Infosys said “EBIT margin decline of 64 bps (basis points) QoQ (quarter on quarter) (was) in line on lower utilisation and pricing pressure.”

On the profit after tax margin (PATM) front, however, Infosys fared better. The PATM in the latest quarter of Q3 FY16 was 21.8 per cent, marginally higher than the previous two quarters but lower than the year-ago quarter when it was 23.6 per cent. The latest quarter PATM was the third lowest in the last nine quarters, as per data from Capitaline.

The profitability ratio fall was not unique to Infosys, as the IT industry has been under pricing pressure in the past couple of years. Tata Consultancy Services, the other IT major bigger in revenue size than Infosys, had announced its Q3 results on Tuesday which revealed a OPM of 30.7 per cent which was the second lowest in the last nine quarters. TCS’ PATM stood at 22.3 per cent, the third lowest in the last nine quarters.