First quarter after Narayana Murthy's return, Infosys gives a pleasant surprise

India's third largest IT exporter Infosys positively surprised for a change, reporting better than expected metrics for the quarter ended June 2013. 

The company, which had lost its way over the last two years growing much slower than the competition, reported net profit of Rs 2,374 crore, or Rs 41.54 a share, down less than a percentage point from Rs 2,394 crore, or Rs 41.89 per share, reported in the March quarter. Analysts were expecting up to three per cent decline in the company's profits.

The firm also reported encouraging top line numbers, raking in revenues of Rs 11,267 crore, up 7.8 per cent over the previous quarter. In dollar terms, Infosys reported $1.9 billion, a rise of 2.7 per cent sequentially, again beating market expectations. 

Operating margins remained flat at 24 per cent.

However, the most surprising part was the company's dollar guidance. While analysts had expected Infosys to cut its yearly outlook by at least one per cent, Infosys held on to its guidance of 6 to10 per cent growth for 2013/14. Many analysts, however, said it could have to be pared given the rupee's recent slide against the US dollar. 

While the company's numbers were impressive, little changed from the past in the vocabulary of its executives during a press meet the company held. CEO S.D. Shibulal's comments were peppered with expressions such as  being "cautiously optimistic" about the future.

"Given that we have higher discretionary exposure and there are regulatory challenges, we have kept the guidance unchanged. We remain cautiously optimistic," he said.

The company's unchanged guidance is impressive because discretionary spending - as some other companies have hinted - is probably being capped by global corporations. Rival company Accenture in June cut its full year guidance citing slower spending from consulting customers.

"One quarter is not a secular trend," Shibulal said, replying to a question on whether Infosys' current quarter momentum would be carried forward. "But we are definitely more aggressive going after growth." 

But will this growth come at the cost of margins? Co-founder and Executive Chairman N.R. Narayana Murthy, at this year's annual general meeting, had hinted that Infosys might do away with its stringent focus on premium pricing to catch up with growth. Shibulal remained noncommittal today, saying, "Murthy has always focused on superior financial performance. Our discussions have been around that aspect." Murthy came out of retirement and joined back Infosys on June 1 after an SOS message from the Board and investors worried about the company's lacklustre growth. Murthy did not attend the press conference.

CFO Rajiv Bansal, however, did hint at margin headwinds during the September quarter - not because of pricing discounts but due to wage hikes doled out by the company recently to employees. That may impact margin by around 300 basis points. Of course, the company will still have to manage the ongoing currency volatility as well. 

Analysts appeared happy with the results and saw signs of a turnaround.

"We expect the company, under the leadership of Murthy, to take steps to further improve employee engagement. We also expect the company to implement stricter performance measurement methods, which may lead to an improvement in the productivity levels of the company, going ahead. These measures should yield higher revenue and profit growth over the next few quarters," Dipen Shah, Head of Private Client Group Research at Kotak Securities, said in a note.

Infosys stock shot up 10.62 per cent and was trading at Rs 2,795 on BSE at 3 P.M. The BSE Sensex was up 1.07 per cent at 19,887.22.