Infosys reported fiscal second-quarter results that exceeded both our and Street expectations. Revenue increased 3.2% sequentially, driven by 3.0% volume growth being partly offset by a $16 million foreign-currency impact due to the appreciation of the dollar during the quarter. Earnings of $0.89 were above our $0.81 estimate and the Street’s estimate of $0.82. Although the company paid bonuses and promoted roughly 12,000 employees, operating margin increased 100 basis points sequentially due to better-than-expected gross margins (facilitated by a 220-basis-point improvement in utilization and a higher offshore effort split) and a 20-basis-point tailwind due to the depreciation of the rupee during the quarter. Management noted that the overall demand environment is stable with improving pipelines in the retail, manufacturing, and insurance verticals being partly offset by some weakness in manufacturing and banking as well as telecommunications.
Although the results exceeded our and Street expectations, growth continues to be anemic compared with its peers, and most of the upside during the quarter was driven by cost initiatives (which is not a sustainable solution over the longer term). In addition, management’s new vision for the company is a multi-year effort exposed to timing, execution, and margin risks. For fiscal 2015, management maintained its previously issued revenue guidance calling for 7% to 9% growth. This implies a deceleration from 2014’s 11.5% growth and is well below the National Association of Software and Services Companies’ (Nasscom’s) projected industry growth rate of 13%-15%. Infosys trades at 16.6 times our revised calendar 2015 EPS estimate of $3.58, a discount to peers such as Tata Consultancy Services, trading at 22 times, and Wipro (WIT $11.93), trading at 19 times.