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Infosys beats Street estimates on the back of eight-quarter-high deal wins

Infosys beats Street estimates on the back of eight-quarter-high deal wins
Photo Credit: Reuters
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India’s second-largest information technology (IT) services company, Infosys, on Thursday reported a 13.4% year-on-year rise in net profit for Q3FY23 to ₹6,586 crore, up from ₹5,809 crore, in turn raising its revenue growth guidance for this financial year (FY). The company upped its FY23 revenue growth guidance to 16-16.5% from the earlier forecast of 15-16%, beating analyst expectations of guidance remaining constant. Operating margin guidance for FY23 was retained at 21-22%.

Interestingly, Infosys reported a significant drop of 2.8% sequentially in its attrition rate to 24.3% — versus 27.1%. Attrition was down 120 bps on a year-on-year basis. One basis point is one-hundredth of a percentage.

Its rival Tata Consultancy Services (TCS), which reported its Q3 results earlier this week, reported a minor decrease in attrition. TCS and Infosys’ figures signal a downward trend in attrition across the industry, which TCS human resources chief, Milind Lakkad, had hinted at for the December quarter.

A 21.7% YoY constant currency growth in digital services led to a 20.2% rise in Infosys’ rupee revenue for Q3, which rose to ₹38,318 crore. According to Infosys, digital services comprised nearly 63% of overall revenue for the quarter. Dollar revenue rose 9.6% YoY to $4,659 million, up from $4,250 million — mainly owing to rupee depreciation and easing supply-side pressures, Infosys said on Thursday.

Analysts said that Infosys’ Q3 performance was a strong one, beating market expectations and largely signalling a resilient December quarter performance on almost all fronts.

Omkar Tanksale, vice-president of equity research at Axis Securities, said, “The overall deal wins of $3.3 billion during this quarter is extremely strong, and the outlook for Infosys remains robust amid the present scenario of uncertainty across the world in terms of tech spending.”

To be sure, while Infosys reported strong total contract value (TCV) in terms of the deals that it won during the quarter, the number of large deals remain muted — as the number of $100 million-plus value clients dropped by one to 38 during the quarter. However, analysts said that this did not necessarily signal weakness on Infosys’ behalf.

Sanjeev Hota, head of research at brokerage firm Sharekhan said that the quarterly deal-win value “was the highest in the past eight quarters.”

Axis’ Tanksale added that the drop in individual large deals is largely seasonal, and is a metric of the market that is seeing the overall IT sector getting a larger number of smaller deals, on the back of uncertainties and pullback of discretionary expenses made by clients in US and EU.

In terms of attrition and employee costs, while Infosys saw consolidation, its per-employee revenue earnings for the quarter dropped by over 6% to $54,200 — down from $57,100 last year. Nilanjan Roy, chief financial officer of Infosys, said during the company’s quarterly press conference that this was a factor of the company being yet to bring a sizeable section of its freshers hired through the year, which stood at over 46,000 for FY23.

“We expect the optimization of operating margins to continue for the upcoming quarters as more of our employee bench comes onboard following their training and upskilling, which is happening as we progress,” Roy said.

Infosys’ analysis of its employee revenue realizations is in line with industry analysts. In December last year, Mint reported that the overall IT sector is expected to see stronger growth of operating margins as more fresher hires come into the full-time employee fold, and new fresher hires slow down amid falling attrition rates.

Operationally, Infosys reported a 10.1% YoY rise in its Ebit (earnings before interest and taxes) to ₹8,242 crore — against ₹7,484 crore. However, its Ebit margin contracted 200 basis points to 21.5% for the December quarter. Sequentially, Ebit margin remained unchanged.

Commenting on the operational metrics and attrition rate, Roy added that cost optimization benefits added resiliency to operating margins for the quarter, and that attrition “is expected to decline further in the near-term.”

Among geographies, while Europe led growth in the west, India saw a de-growth of 5.4% in CC terms for the quarter. Europe registered a growth of 25.3% while North America grew at 10.5%. However, India only accounts for 2.4% of Infosys’ total revenues.

Constant currency growth for the December quarter stood at 13.7% sequentially, against analyst expectations of around 11%.  The order book (a sum total of new deals won) came in at an eight-quarter high, up 30% at $3.3 billion against $2.5 billion in the previous quarter. Market analyst Jefferies had forecast a deal pipeline of $2-2.5 billion for the quarter under review.

“Our revenue growth was strong in the quarter, with both digital business and core services growing,” said Salil Parekh, managing director and chief executive of Infosys.  

“As reflected in the large deals momentum, we continue to gain market share as a trusted transformation and operational partner for our clients. Our capabilities and scale make us a preferred choice for clients looking at consolidating vendors. We remain focused on helping businesses accelerate their digital agenda to uncover new value and growth, as well as improve operational and cost effectiveness,” he added.

Unlike TCS, where retail and consumer vertical contributed the most among sectors, Infosys saw financial services leading the pack with a contribution of 29.3%, followed by retail (14.3%), energy (13%) and communication (12.3%).

In addition to financials, the board has approved an annual stock incentive of ₹3.25 crore to Parekh.

Shares of Infosys ended Thursday’s session at ₹1,480.55 apiece, up 0.62% against a 0.39% rise in the BSE IT index. The quarterly results were announced after market hours.