Revenue down after Infosys margins fall

What’s more, in an unexpected move, Infosys raised its FY23 CC year-on-year revenue growth guidance to 14-16% from the earlier 13-15%. Management said the demand environment remains extremely strong with increasing trends in digital and cloud services.

But these encouraging aspects were impacted by weak operating performance. Ebit (earnings before interest and taxes) margin fell to a multi-quarter low of 20.1%, down 150 basis points sequentially, behind the consensus estimate of 21%. One basis point is 0.01%.

Note that the aforementioned peers also saw a higher-than-anticipated contraction in their margins in Q1, primarily due to higher subcontractor costs and increased travel expenses. So, against that backdrop, margin compression was no surprise, but the weakness in its build-up was disappointing. Infosys has maintained its FY23 Ebit margin guidance at 21-23%.

“In line with what we have seen with our peers, Infosys’ margins were impacted. Infosys now expects FY13 margins to be at the lower end of its guidance range. Earlier, the Street was expecting margins in the mid-range of this band. So, while the company’s result was strong on revenue growth, it disappointed on margins, making it a mixed result,” said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas Securities India.

Further, attrition, measured on a last 12-month basis, rose to 28.4% sequentially for Infosys, from 27.7% in Q4 FY22. The management is hopeful that the induction of freshers in the IT industry will make it easier to leave the job.

Lastly, Infosys reported winning big deals worth $1.7 billion in Q1FY23, half of which were new deals. Note that big deals fell sequentially and yearly. According to management, deal wins were extensive during the quarter and the company continues to see a strong pipeline of large deals.

But, analysts are cautious. “Infosys said the large deal pipeline is higher after Q1FY23 as compared to three-six months ago. It is similar to HCL commentary. We suspect that clients are accelerating their budget spending in 2022 before potentially exceeding the constraints at the end of 2022,” Nirmal Bang Institutional Equities said in a report.

All told, earnings for Infosys, like peers, continue to decline. Jefferies India has slashed earnings estimates for FY 2013-25 by 1-3% (on margin) and Infosys is expected to deliver 13% earnings CAGR (compound annual growth rate) in FY 2012-25.

“The company has raised revenue growth guidance, but it doesn’t drastically change the Street’s earnings estimates,” said one analyst requesting anonymity. Weak margins, especially in manufacturing, high attrition in large deals and moderation were other dampeners. He cautioned that the stock’s outlook will remain muted.

So far, in CY22, Infosys stock has declined 20%, which is less than Nifty IT index’s 27% fall, but higher than TCS. Bloomberg data shows Infosys stock is trading at 22 times estimated earnings for FY24 versus 24 times TCS’s. Management comments from large Indian IT companies are upbeat despite concerns of a US-led slowdown weighing on their FY24 revenue outlook. In that context, valuations of Tier-I IT companies are at risk of further improvement.

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