13 Jan 2018 13:52 IST

Infosys returns to high growth in Q3, net profit zooms 38.3%

$225-m reversal from US tax authorities boosts balance sheet

Infosys on Friday welcomed new CEO Salil Parekh with better-than-expected quarterly results, aided by a tax reversal from the US tax authorities and new client wins.

Infosys, which maintained its margins, said its third-quarter net profit grew 38.3 per cent at ₹5,129 crore on a year-on-year basis and 37.6 per cent on a sequential basis. Its revenues grew 3 per cent at ₹17,794 crore and 1.3 per cent on a sequential basis.

The net profit growth was largely due to a one-time windfall gain which Infosys claimed as a part of a reversal of the tax provisions of about $225 million in an Advance Pricing Agreement deal with the US Internal Revenue Service. This had a positive impact on the consolidated basic Earnings Per Share for the quarter ended December 31, 2017, by approximately $0.10.

Parekh, who took charge on January 2, said he would unveil an updated strategy in April. He said he would strive to build a stronger Infosys at a time when software exporters face technology shifts and changing businesses.

Nandan Nilekani, Chairman of the Board, said the company has “stabilised” and everything is “settled”, evidently referring to the spat between co-founders and former CEO Vishal Sikka. He said he would stay as long as it was needed and “not a day longer”.

According to Sanjoy Sen, Doctoral Research Scholar, Aston Business School, the timing of the tax reversal has been immensely fortuitous and made a significant difference between what would have otherwise been viewed as a mildly positive performance, as against a reasonably good performance with the ability to swing market sentiment in its favour.

Infosys reported dollar revenue growth at 1 per cent and constant currency revenue at 0.8 per cent QoQ and maintained its annual growth guidance at 5.5-6.5 per cent on a constant currency basis and 2.1-3.1 per cent in rupee terms.

The board re-designated Pravin Rao as the Chief Operating Officer and Whole Time Director, but the company also saw the exit of Rajesh Murthy, who quit after 25 years with the company.

For the first time in years, Infosys generated $593 million in free cash flow. CFO MD Ranganath said EBIT margin improved to 24.3 per cent. According to Emkay Research, retaining guidance on both revenue growth and operating margins are positive. Infosys shares closed marginally at ₹1,078, up or 0.26 per cent.

While Parekh has had an initial look at the growth strategy of Infosys, with a focus on IT consulting and wrapping digital services around it, he said that there is still some work to do. Analysts agree.

“Many Indian companies are locked in their traditional business and need to speed up the process of creative disruption. Only then can they manage changes,” said DD Mishra, Research Director, Gartner.