Expect Infosys margin to remain in 24%-26% range over next couple of years: Hitesh Shah, IDFC

In a chat with ET Now, Hitesh Shah, Director-Equity Research, IDFC, shares his views on the Infosys results. Excerpts:

ET Now: A lot of positive commentaries are coming about from Vishal Sikka. Any key points that have caught your attention that you would like to highlight and what exactly you made of it.

Hitesh Shah: Surely, a good set of numbers came out of Infosys. Revenue was much higher than the street expectation, though it was in line with our expectation, and there was a margin beat as well. What I would like to highlight is that margin was actually driven by better realisation and higher employee utilisation and offshore shift rather than just another cost-cutting measure, which is very positive. If it were only by cost cutting, I would not have read it as positively.

If you look at some of the growth, it has been driven by not the existing verticals, but ECS. Energy utilities, communication services have grown almost 8% quarter on quarter in constant currency terms. Even manufacturing has grown 4% in constant currency terms, which is positive. Just to complete the picture on slightly negative side, a couple of things – BFS has not grown as well.

BFSI, including insurance, has grown at about 2% QoQ and most of that growth was actually driven by the insurance vertical. Attrition still remains high, though attrition is a very lagging indicator and most of the guys who would have left in the last quarter were those who resigned in April, May, and June. So, I would not read too much into the attrition number.

ET Now: The performance in quarter two has been commendable as far as the margins are concerned. How do you see this moving in the next two quarters?

Hitesh Shah: I believe that one should not extrapolate the Q2 margin performance in Q3, Q4, primarily because they have already improved by significant margins from where they were probably four or five quarter back.

As the company goes through a fine tuning of their strategy, there could be some significant business investments as even management spoke about in the previous press conference and which could lead to some pressure on the margin. My view is the margin should remain in a band of about 24% to 26% over the next couple of years for Infosys.

ET Now: Do you think it was a little bit too optimistic with respect to the guidance that they have maintained at 7% to 9% because this means an ask rate of 2.5% to 3.8% for the next two quarters. Realistically, do you think this is achievable?

Hitesh Shah: The ask rate is not very high, a little less than 2%, but for 9% the ask rate is really high at 3.8%, which is still challenging. The thing to look at is they have had cross currency headwinds of almost 100 bps, which they have completely absorbed, which shows the confidence on the business pipeline that the management has.

I do not think they would do 9% for the full year. They might actually do somewhere closer to 8-8.5%, though not changing the guidance after the half year when you had cross currency headwind of 100 bps. That signals the management confidence on the business and the pipeline.

ET Now: Now net employee additions have been at 4000 plus after very long, but the attrition still remains high at 20%. Is it something to worry about?

Hitesh Shah: Net addition at 4000 is a positive number. They are operating at an 82% utilization, excluding trainees. I am not much worried on the head count addition even when it was not so high in the previous few quarters.

My view is the head count addition would keep improving as we complete FY15 and get into FY16. However, on the attrition number, it is a very lagging indicator. People who resigned in April, May, June would have left actually in July, August, September and to that extent it is not really a relevant number when we speak in mid October.

Also, as we would see reduced resignation in October, November and December, it would only reflect in the quarterly attrition in Jan, Feb, March and on top of that, Infosys reports TTM attrition, which looks at trailing 12 months. So the reported figures might actually start looking good probably after the June quarter next year or thereabout. So I am not as worried on the attrition, though it is a key monitorable.