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Did investors miss the point in Infosys results this quarter?

It often happens that when a company is investing heavily into a strategic, next-generation project, its margins take a hit and the stock goes down. The reaction to attributed to investors’ inability to full understand a company’s business and priorities.

But sometimes, it way work the other way too. The stock of Infosys actually went up on Friday, despite the company missing analysts’ growth expectations, because its margins improved.

sikka

Why did the margin improve? The simple answer is that it did not have to pay as many salaries it used to due to nearly 10,600 employees, or about 6.5% of its total base, resigning during the quarter.

Why during the quarter? Because Infosys gave salary hikes on April 1, and naturally anyone who wanted to resign in the last six months, had actually been putting it off for the increment to kick in, and then leave on a higher base.

So, in a way, the high attrition is not really that big a surprise, especially given that Infosys has been getting a lot of bad press recently.

But what is worrying is the short-sighted commentary by analysts on Infosys’ results. Most of them have noted with satisfaction that Infosys’ profit margin has improved.

Infosys lost about 10,600 experienced professionals, and hired only around 3,950 experienced professionals. Of course, it hired 7,500 freshers for training, but that is really not the same thing.

So, instead of 6,650 experienced professionals, Infosys hired 7,500 freshers.

What this means is that the existing experienced people were utilized more effectively. The per-person productivity went up, and as a result, efficiency and profitability increased.

‘Utilization’ ratio is near its all-time high of over 80%.

All good things. But there is a reason why IT companies usually report utilisation rates of 68-78%. That has to do with growth and investing in non-billable projects and research and development.

In other words, higher levels of utilization is not always good from a future growth perspective. This has been forgotten in investors’ and analysts’ reaction to Infosys’ numbers for the last quarter, despite the fact that a red flag, in the form of poor revenue growth, was present.

Will the stock correct as people realize what drove the profit growth? Or were they simply expecting much worse, and are legitimately relieved that it was only this bad, and not worse?

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