infosys revenue growth: Infosys posts better Q1 growth but discretionary spending is yet to pick up

ET Intelligence Group: Among the top three software exporters who have declared first quarter numbers so far, Infosys delivered better performance beating the 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 with Tata Consultancy Services (TCS) and HCL Technologies, helped by a low base in terms of a revenue drop in the previous quarter and a one-off revenue benefit from a client.

However, like peers, Infosys echoed a continued slack in discretionary spending by clients. During an analyst conference call, it mentioned that though there are early signs of pick up in the banking, financial services, and insurance (BFSI) vertical, the largest revenue generator for the company, a strong recovery is not yet visible. 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 earlier guidance of 1-3% growth. The higher guidance consists of about 0.8% estimated contribution by the company’s recent acquisition of Germany based in-tech while the rest fuelled by the BFSI uptick, traction in the key markets of the US and Europe, and consistent trend in deal wins in the June quarter. The operating margin guidance is retained at 20-22%.

The revenue guidance implies that the company expects on average 1.5-1.6% sequential growth in each of the remaining three quarters of the current fiscal year. While that makes its guidance conservative, the management stated that usually the first half of a fiscal constitutes better revenue growth compared with the second half where the top line is affected by holidays and budgetary decisions by clients.

For the June quarter, revenue increased by 3.3% to $ 4,714 million compared with the average analyst estimate of 2.8% growth. In the rupee terms, revenue increased by 3.7% from the previous quarter to Rs 39,315 crore. The operating margin improved by 100 basis points sequentially to 21.1%, which included 40 basis point addition due to the one-off revenue benefit from a client. Net profit fell by 20.1% to Rs 6,368 crore on account of a higher base in the previous quarter due to higher other income.

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

On the human resources front, the company recorded a sequential contraction in the headcount for the sixth consecutive quarter though the extent of the fall has been shrinking gradually. In the June quarter, it fell by 1,908 to 3,15,332 compared with a drop of 6,940 in the year-ago quarter.

The stock has gained nearly 24% over the past three months following hopes of a rebound in discretionary spends. Given that such spends may take more time to recover, the stock may show bouts of profit booking in the short term.