Infosys disappoints on profit, ups FY23 revenue growth guidance to 14-16%

Infosys’ first quarter results for FY23 beat Street estimates for revenue growth but the IT services major disappointed on margin performance because of higher talent costs. Its net profit for Q1FY23 was below expectations at Rs 5,360 crore, up 3.2 per cent year-on-year (YoY) but was down 5.7 per cent sequentially.

Despite an uncertain macro-economic environment and talks of a recession in key economies, including the US, Infosys has upped its FY23 revenue growth guidance to 14-16 per cent, from the earlier projection of 13-15 per cent.

For the first quarter of FY23, Infosys reported revenue growth of 23.6 per cent YoY to 34,470 crore. The figure was up 6.8 per cent sequentially. In the US dollar terms, Infy’s revenue was up 5.5 per cent sequentially on a constant currency basis. Infosys managed to beat Bloomberg estimates on top line (the revenue estimates were for Rs 34,008 crore). But the company missed net profit estimates of Rs 5,671 crore.

Even bigger disappointment was over the margin, which came in at 20.1 per cent, down from the company’s range of 21-23 per cent, over higher retention costs and cross-currency headwinds.

“We had an excellent start to the financial year with 5.5 per cent sequential growth in constant currency terms. We continue to gain market share with our Cobalt cloud capability and the differentiated digital value proposition. The pipeline of big deals is larger than what we had three to six months ago,” said Salil Parekh, CEO & MD, Infosys.

Parekh acknowledged that there have been discussions on recession and interest rates going up and that he sees pressure of this on some segments like mortgage businesses within the financial services sector.

 Mitual Shah, head of research, Reliance Securities, said: “Infosys reported a subdued Q1FY23 performance. The margin was below our expectations. However, the management raised its FY23 revenue growth guidance from 13-15 per cent to 14-16 per cent and also maintained its Ebit margin guidance at 21-23 per cent, assuring a better performance during the rest of FY23. Considering the industry-leading double-digit revenue growth, the rising share of digital business (61 per cent of revenue), likely improvement in Ebit margin levels, and valuation comfort after stock price correction, we have a ‘buy’ recommendation.”

Overall, the June quarter results of Infosys were a mixed bag. There was still no clarity on attrition and TCV (total contract value) was muted on a sequential basis. Large deals’ TCV came in at $1.7 billion, down 25 per cent QoQ and down 35 per cent YoY.

Infosys’ management, like the management of other top-tier IT firms, exuded confidence over deal momentum and did not see much impact on customer sentiment over IT spends.

Like other top players, Infosys, too, missed estimates on margin performance. It looks like talent retention continues to be a challenge with margins getting impacted due to high employee costs. In the case of Infosys, the margin was affected due to higher compensation costs -- which had a 160-basis point effect on the margin; also, there was lower utilisation due to higher fresher addition. According to Nilanjan Roy, CFO, Infosys, “We are seeing growth traction in the market and we are clear that we must put everything behind and focus on growth.”

Infosys was the largest hirer of fresher talent in Q1 when compared with peers like TCS and HCL Technologies. Infosys and Wipro are the only two large players that announced a robust hiring addition.

Infosys added a total of 21,000 freshers during the quarter, much higher than TCS’ 14,136.

Revenue growth for Infosys, like its peers, was broad-based. It was led by America (4.5 per cent QoQ and 17.8 per cent YoY) and Europe (3 per cent QoQ and 21.9 per cent YoY). This was much better than TCS, which saw its UK and Continental Europe revenue decrease by 3.3 per cent QoQ and 0.7 per cent QoQ, respectively.