Weak discretionary spends to weigh on Infosys sales in Q4; margin seen up

In June 2023, Infosys said it had 50 active client projects for leveraging Gen AI capabilities. (Image: Bloomberg)

The country’s second largest IT services provider, Infosys is expected to report another weak set of quarterly numbers in the January-March quarter due to continued sluggishness in discretionary spending in the US. However, analysts expect the company’s operating margin to expand aided by cost optimisation under Project Maximus. The company will report its earnings on Thursday.

Additionally, the fourth quarter is generally considered weak for IT companies with fewer working days and prolonged furloughs in January. With all these factors in consideration, average estimates from six brokerage firms expect the Bengaluru-headquartered company to report a revenue of Rs 38,470.90 crore during the quarter, marking a sequential decline of 1%.

In a pre-earnings research note, broking firm Nomura said, “We expect cc decline of 1% qoq due to continued weakness in discretionary spends and weak seasonality for Infosys”. Brokerage ICICI Securities expects the company to clock in revenue worth $4.6 million in January-March from the recently acquired inSemi business.

A decline in the topline, topped with additional staff-related expenses such as wage hikes is also seen to have affected the profitability of the company in the March quarter. Infosys had rolled out wage hikes effective November 1, 2023, to all its employees.

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The net profit is seen at Rs 6,103.60 crore, nearly unchanged from the previous quarter.

Despite a fall in revenue, the company is seen to expand its margins by 20 basis points sequentially to 20.7%.  The absence of a one-time cost from the McCamish cyber incident and operational efficiencies has likely acted as a tailwind. In November 2023, Infosys’ step-down subsidiary McCamish was hit by a ransomware attack, which resulted in the unavailability of certain applications and systems.

However, brokerages are divided on the margin front with companies such as Nuvama and ICICI Securities expecting a fall in the operating margin, while Axis Securities, Nomura, Emkay Global and Jefferies are seeing it expand.

“We expect margins to expand by 30 bps QoQ, driven by 60bps margin recovery from the McCamish incident in 3Q and operational efficiencies,” Jefferies said.

DEAL WINS

As a silver lining, many brokerages said they saw strong deal wins for Infosys in the quarter. Kotak Institutional Equities said it expects large-deal total contract value of $3 billion.

On similar lines ICICI Securities said in a research note, “Deal pipeline is strong and deals won in the previous quarter are ramping up as expected. We expect the order book to be in line with an average quarterly run-rate of $2.5-3.5 billion”.

However, brokerage firm JM Financial said it expects limited contribution from mega deals.

GEN AI DEALS

Infosys will likely report revenue from its generative artificial intelligence (Gen AI) deals after TCS said it has doubled its AI and Gen AI deals in Q4 to $900 million, nearing on to global giant Accenture.

In June 2023, Infosys said it had 50 active client projects for leveraging Gen AI capabilities.

Deals from Gen AI pose importance as most clients are still cutting back on extra spending. TCS last week indicated that clients are still cautious about IT spending.

GUIDANCE EYED

Most brokerages expect Infosys to maintain its revenue growth guidance in the range of 2-7% in the financial year 2025. However, most brokerages continue to be wary about any improvements in discretionary spending.

“Channel checks and peer commentaries do not indicate any immediate pick-up in short-term discretionary projects, with cost optimisation still imperative,” Axis Securities said in a pre-earnings note.

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Investors will further watchout management commentary on headcount, fresh hirings, and attrition. Infosys’ headcount fell by 6,101 in October-December, marking a decline for the fourth consecutive quarter.

However, the attrition has been declining consistently over the quarters. In the quarter ended December, the company’s attrition declined 170 bps to 12.9%from the 14.6% reported in the previous quarter.

Additionally, many brokerages expect Infosys to announce a share buyback on April 18. The software exporter last bought back shares worth Rs 9,300 crore in February 2023.