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Two trends that make Infosys a study in contrast

The performance of Infosys over the past few quarters throws up a divergent trend.

At one end, the country’s second largest software exporter has been reporting either similar or sometimes better sequential revenue growth compared with larger peer Tata Consultancy Services (TCS) over the past four quarters.

At the other end, it has been losing employees at a faster rate amid pressure on profitability. Its attrition rate inched up to 23.4% in the June quarter from 23% a year ago.

This contrasting performance raises questions on whether Infosys is gaining new business by lowering realisations and whether higher attrition is a result of cost controlling to support margins.

While investors may rejoice at the company’s improved growth guidance for the current fiscal and sustained client addition, these questions still linger.

The company’s revenues grew by 2.3% sequentially to $3,131 million in the June 2019 quarter. This was better than the 1.6% growth posted by TCS. In addition, Infosys added two clients in the $100 million and above category to take the number to 27, while it was stagnant at 44 for TCS.

While there are concerns over the demand momentum in the recent quarters, the data provided by Infosys shows a gradual recovery in the demand trend. Infosys bagged new orders worth $2.7 billion in the June quarter as against $1.6 billion in the previous quarter.

For TCS, the size of new deals fell to $5.7 billion from $6.2 billion from the previous quarter. The difference in the performance of the two companies may be attributed to the vast difference in their scale of operation and cyclical trend in various verticals.

What may also offer comfort to investors is the revised capital allocation policy of Infosys. The company plans to return 85% of the free cash flows to investors in FY20 compared with the earlier target of 75%. This together with improved revenue growth guidance of 8.5-10% for FY20 from the earlier band of 7.5-9.5% augurs well for the stock in the short term. However, the long term trend will depend upon how well the company manages the attrition rate and the margin profile.

Source: Economic Times