Infosys posted good growth in Q1 but discretionary spending has yet to pick up

ET Intelligence Group: Among the top three software exporters that have reported first-quarter numbers so far, Infosys has fared better, beating average analyst estimates on parameters including revenue, profit and operating margin. The country’s second-largest IT company reported stronger sequential top-line momentum compared to Tata Consultancy Services (TCS) and HCL Technologies, helped by a lower base in terms of revenue declines in the previous quarter and one-time revenue gains from clients.

However, like peers, Infosys echoed the continued slowdown in discretionary spending by consumers. During an analyst conference call, he mentioned that despite early signs of a pick-up in the banking, financial services and insurance (BFSI) vertical, the biggest revenue generator for the company, a strong recovery is yet to be seen. BFSI contributed around 28% to the company’s revenue in the June quarter.

Infosys has raised its revenue growth forecast in constant currency terms for FY25 to 3-4% from the previous guidance of 1-3% growth. About 0.8% estimated contribution to higher guidance is from the company’s recent acquisition of Germany-based In-Tech while the rest is due to BFSI uptick, traction in key markets of US and Europe and consistent trend in deal wins in June. Quarter operating margin guidance is maintained at 20-22%.

Revenue guidance suggests that the company expects to average 1.5-1.6% sequential growth in the remaining three quarters of the current fiscal. While it made its guidance conservative, management said that the first half of the fiscal year typically has better revenue growth compared to the second half where the top line is impacted by client vacations and budgetary decisions.

For the June quarter, revenue rose 3.3% to $4,714 million, compared with the average analyst estimate of 2.8% growth. In rupee terms, revenue rose 3.7% over the previous quarter to Rs. 39,315 crores. Operating margin improved 100 basis points sequentially to 21.1%, including a 40 basis point increase due to one-off revenue gains from clients. Net profit fell by 20.1% to Rs. 6,368 crores.

The company reported total contract value (TCV) of $4.1 billion for large deals in the June quarter, a strong traction compared to TCV of $2.3 billion in the year-ago quarter.

On the human resources front, the company reported a gradual contraction in headcount for the sixth consecutive quarter, although the scale of the decline is narrowing gradually. It fell by 1,908 to 3,15,332 in the June quarter compared to a decline of 6,940 in the year-ago quarter.

The stock has risen nearly 24% in the past three months on hopes of a recovery in discretionary spending. Given that such expenses may take longer to recover, the stock shows increased profit booking in the short term.