Information technology firm Infosys is expected to post tepid numbers for the fourth quarter ending March 31, 2024, as discretionary spending remains elusive. India’s second-largest IT services company will declare its results on April 18.
Highlighting headwinds and tailwinds impacting the company's performance, analysts remain cautious yet optimistic for Infosys in Q4.
Factors such as recovery from furloughs, operational efficiencies, and the absence of one-time costs related to the McCamish cyber incident are seen as tailwinds to margin. On the other hand, challenges such as visa costs and wage hikes are potential headwinds.
As Infosys gears up to release its fourth-quarter earnings, here is a list of five themes that will be closely watched.
Revenue Growth
Analysts anticipate Infosys to post flattish revenue for the fourth quarter. Tepid discretionary spending and the impact of wage hikes are expected to drag down revenues. The Bengaluru-headquartered firm had rolled out wage hikes effective November 1, 2023, to all its employees.
According to Moneycontrol’s estimates, Infosys is expected to post revenue of Rs 38,413 crore for the quarter, implying a 2.6 percent year-on-year (YoY) increase but a sequential decline of 1.1 percent.
Net profit is estimated to be flat both sequentially and YoY at Rs 6,128 crore.
Dollar revenue is expected to decline in Q4 even after factoring in a cross-currency tailwind in the range of 20 basis points (bps), brokerages said. However, the absence of a one-time cost from the McCamish cyber incident and operational efficiencies could partially offset challenges.
In November 2023, Infosys’ step-down subsidiary McCamish was hit by a ransomware attack, resulting in the unavailability of certain applications and systems.
Brokerage ICICI Securities expects the company to clock in revenue worth $4.6 million in January-March from the recently acquired inSemi business.
Street would expect clarity on how the company performed in Q4 to understand the wider prevailing demand environment.
Revenue and Margin Guidance
Revenue and margin guidance for the fiscal year 2024-25 (FY25) will be closely monitored.
Brokerages anticipate Infosys’ revenue guidance for the fiscal year to be in the range of 2-7 percent. Among them, analysts at ICICI Securities take the most conservative stance, projecting the range to be between 1.5-2 percent.
On the other hand, Antique Stock Broking is the most bullish, expecting the range to be 5-7 percent.
Infosys has revised its annual revenue growth guidance four times in the previous four quarters. In January, it narrowed its revenue growth guidance for the full year to 1.5-2 percent for the full year. The move came after it had earlier slashed revenue guidance in September to 1-2.5 percent from 1-3.5 percent.
Before that, the company had reduced its revenue guidance for the fiscal to 1-3.5% from 4-7%, amid an increasingly challenging demand environment. Therefore, analysts would look for a more stable number to work with.
On the margins front, analysts anticipate that Infosys will maintain its operating margin guidance for the fiscal year 2024-25 in the range of 20-22 percent.
In Q3, operating margin was down 70 bps to 20.5 percent, which was affected by furloughs and salary hikes.
Demand check
The fourth quarter for IT companies is typically a weak one, due to seasonal factors, resulting in subdued sequential growth. Q4 is somewhat seasonally weak for the IT sector because of fewer working days and additional furloughs in January.
Tata Consultancy Services, Infosys' major competitor, recently released its results and highlighted that clients remain cautious about IT spending. Discretionary IT expenditures are yet to show signs of recovery, with companies maintaining their focus on cost optimisation deals.
Nomura said its recent interactions with companies suggest demand is still sluggish. “Recent guidance cut from Accenture also points to tightening in client spending,” the brokerage added.
“Deal pipeline is strong and deals won in the previous quarter are ramping up as expected. We expect orderbook to be in line with an average quarterly run-rate of $2.5-3.5 billion,” said ICICI Securities in a research note.
Brokerage JM Financial said it expects limited contribution from mega deals in Q4.
Employee metrics
Infosys’ headcount shrunk by 6,101 for the quarter ending December 31, making it the fourth consecutive quarter in which the company ended with fewer employees.
Analysts opine that furloughs will have a marginal bearing in Q4FY24, impacting margins.
Over the quarters, attrition has been declining consistently, indicative of a cooling talent market as attrition rates further normalises. For October-December, the company’s attrition declined 170 bps to 12.9 percent from the previous quarter's 14.6 percent.
Commentary by the management on headcount, furloughs, and attrition will be closely monitored.
In January, the company had said it sees no immediate campus requirement and would recruit as and when demand arises. Street would want an update on that front as well.
Gen AI
Infosys might declare its revenue from generative artificial intelligence (Gen AI) deals after larger rivals Accenture and TCS declared theirs, experts say.
It is worth noting that TCS is the first Indian IT company to declare revenue from Gen AI deals. At $900 million, the company doubled its revenue from the nascent technology in the quarter.
In June 2023, Infosys said it had 50 active client projects in the dock for leveraging Gen AI capabilities. The Street would expect commentary on this metric and its market share.
Revenue generation through Gen AI deals has become more important at a time when most clients are cutting back on spending amid challenging times.
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