Infosys Q1 Results: FY24 Guidance Slashed As Clients Cut IT Spending

Infosys Ltd. has slashed its revenue growth guidance for fiscal 2024, despite its earnings meeting estimates in the April-June quarter, as clients cut back on discretionary spends amid fears of a slowdown in their biggest market.

Revenue of India’s second largest IT services company rose 1.31% over the previous three months to Rs 37,933 crore in the quarter ended June, according to an exchange filing on Thursday. That compares with the Rs 37,843-crore consensus estimate of analysts tracked by Bloomberg.

Infosys Q1 Results: Key Highlights (Consolidated, QoQ)

• Revenue up 1.3% at Rs 37,933 crore, as against an estimate of Rs 37,843 crore.

• EBIT up 0.17% at Rs 7,891 crore, as compared with an estimate of Rs 8,983 crore.

• EBIT margin down 23 basis points at 20.80%. Analysts had estimated it at 20.9%.

• Net profit down 3.1% at Rs 5,945 crore versus an estimate of Rs 6,245 crore.

In constant currency terms, revenue grew 1% sequentially.

The Bengaluru-based IT company now expects to clock constant currency revenue growth of 1-3.5% in FY24, as compared with 4-7% estimated at the end of the January-March quarter. That compares with the 15.4% top-line growth Infosys reported in FY23. The operational profitability, measured as earnings before interest and tax, is seen at 20-22% in FY24.

Infosys cited delays in decision-making by clients and spending cuts as reasons for the sharp downward revision in revenue growth guidance.

“We have seen some of the deal signings and start dates being delayed, with that we see a lot of revenue from those large and mega deals towards the later part of the financial year,” Infosys' Chief Executive Officer Salil Parekh said in a media conference. “Through the (June) quarter, we have seen volumes in some of the clients impacted, where they were reducing transformational projects or slowing down decision-making.”

Jefferies called Infosys’ latest guidance a “shocker”. A Bloomberg Intelligence analyst said the forecast points to a larger-than-expected slowdown.

Infosys isn’t alone in spelling out a gloomy forecast.

Tata Consultancy Services Ltd., which had a flat June quarter, said revenue is unlikely to return in a hurry with double-digit growth out of the question. “There’s a growth fear after a flat Q1,” CEO Krithi Krithivasan said, during a post-earnings media interaction on July 12. 

Similarly, Infosys’ smaller peers, HCL Technologies Ltd. and Wipro Ltd., have guided for 6-8% revenue growth in FY24 and -2% to 1% in Q2 FY24, respectively, underscoring the incoming pain from macro headwinds in their biggest market—the U.S.

Revenue of Infosys’ financial services vertical—which makes up nearly a third of the top-line—fell 1.45% sequentially to Rs 10,661 crore in Q1 FY24. Pricing pressures were also seen in retail (down 0.43%) and hi-tech (up 2.24%) but other verticals—including manufacturing (up 5.35%) and life sciences (up 2.53%)—supported earnings.

“In the short-term, we see some clients stopping, or slowing down transformation programs and discretionary work. This is especially so in financial services, in mortgages, asset management, investment banking and telecom,” Parekh said. “We also see some impact in the hi-tech industry and in parts of retail.”

Geographically, both the North American and European markets shrank marginally, with minor gains seen in Rest of World and India markets.

To be sure, Infosys has maintained the dealmaking momentum. The company clocked large deal wins worth $2.3 billion in April-June, up from $2.1 billion in the previous quarter. 

Its net client additions fell, from 115 in Q4 FY23 to 99 in Q1 FY24, but the active client base grew by nine to 1,883. As on June 30, the company had $940 million-plus clients and 38 that brought in more than $100 million each. Infosys’ top 10 clients brought in a fifth of the overall revenue.

“We are seeing more deals around efficiency,” Parekh said at the presser, underscoring the trend seen in the wider industry.

What’s notable, however, is the amount of AI work Infosys is doing for its clients. The Bengaluru-based IT firm is doing around 80 generative AI projects with clients and has trained 40,000 employees in the technology.

“Generative AI is going to transform everything in our portfolio,” Parekh said.

That Infosys has managed to clock an EBIT margin of 20.8% in April-June and aims to maintain it at those levels for the full fiscal is indicative of the myriad levers it’s deploying to shore up its operational profitability in the absence of meaningful revenue growth.

“Q1 operating margins were resilient in an uncertain macro environment on the back of our continued focus on cost optimisation,” Nilanjan Roy, chief financial officer at Infosys, said. “The company’s operational discipline, including productivity measures and higher utilisation helped margins for the quarter.”

It merits a mention here that Infosys’ headcount has now declined for two consecutive quarters—this time by a net 6,940 employees. The attrition rate has eased by 360 bps to 17.3% on a trailing twelve-month basis. The utilisation level has improved to 78.9% from 76.9%. The company is non-committal on its hiring plans for the year, and refused to comment on when the much-delayed salary hikes will be rolled out. 

On Thursday, shares of Infosys fell 1.73% to Rs 1,448.85 apiece on the BSE, even as the benchmark Sensex ended the day 0.71% higher at 67,571.90 points. The quarterly results were declared after market hours.