Infosys Projects Weak Sales Outlook, Shares Dive

The company forecast annual revenue growth to range between 4% and 7%, falling short of the average analyst estimate of nearly 11%. Infosys projected operating margin at 20-22%. The company’s US-listed shares plunged more than 9% in early trading.

In a post-earnings call with reporters, chief executive Salil Parekh said the company witnessed unplanned project ramp-downs and decision-making delays across sectors, including financial services, retail and telecom.

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Chief financial officer Nilanjan Roy said the slowdown was driven by deal volume contraction, as well as some cancellations, especially in the North American market.

Indian software services companies are grappling with subdued demand as clients become wary of spending amid fears of an economic slowdown, the impact of higher interest rates, and bank failures in the US and Europe. Infosys’s larger rival, Tata Consultancy Services, on Wednesday, reported weaker-than-anticipated quarterly earnings because of a spending slowdown in North America.

In the March quarter, Infosys reported a 1.6% contraction in North American revenue from the preceding three months. Additionally, revenue from the banking, financial services, and insurance (BFSI) sector, which accounted for almost 29% of the company’s revenue, declined by 1.7% sequentially.

Overall, March quarter net profit rose 7.8% to ₹6,128 crore from a year earlier but declined 7% from the preceding three months. Revenue rose 16% to ₹37,441 crore from a year earlier but fell 2.3% on a sequential basis.

Omkar Tanksale, an analyst at Axis Securities, said the company missed Street expectations on every metric. “The Infosys figures are really disappointing. The figures add further to scepticism behind revenue growth in IT services in FY24. Infosys is known for offering conservative guidance. But, even with that, a higher guidance range of 7% shows clear weakness," he said.

Ruchi Burde Mukhija, an analyst at Elara Capital, said that the quarterly numbers are shocking.“Infosys itself missed its own revised guidance that was given three months ago. Even the FY24 guidance is very weak, and looking at the compound quarterly growth rate projection — which is 1.7% to 2.8% — this comes against a rate of 2.1%. So, the lower band of growth does not give much comfort. The growth guidance implies risks for Infosys right now," she said.

Tanksale added that Infosys’s figures were significantly more impacted by the BFSI slowdown in North America than that of TCS.

“Infosys could be the weakest IT result of the overall bunch. TCS has retained a good deal of value and revenue base, and even the BFSI vertical was not hit as badly as Infosys. FY24 will definitely be a decline in revenue growth momentum for Infosys," he said.

In Mumbai, shares of Infosys fell 2.8% to ₹1,388.60, underperforming the 0.06% gain on the BSE IT index.

Mitul Shah, head of research, institutional equity at Reliance Securities, added that revenue growth and margin guidance fell below expectations, implying a weak FY24.

Meanwhile, Parekh said that Infosys is actively pursuing new opportunities, including generative AI (artificial intelligence) as a major initiative. “We are building an in-house generative AI platform to streamline our internal operations for the software development applications and client-specific use cases. The AI projects are based on both third-party licensed tools and in-house use cases," he said.

Infosys reported a 3.2% sequential decline in constant currency growth, with the total contract value of new deals dropping from an eight-quarter high of $3.3 billion in the December quarter to $2.1 billion in the three months ended 31 March. Despite this, financial services remained the largest revenue contributor, accounting for 28.9% of total revenue, followed by retail (14.8%), communication (11.8%), energy & utilities (12.9%), manufacturing (13.5%) and life sciences (7.2%).

North America, however, saw a decline in revenue contribution of 100 basis points, while the European market grew by 120 bps during the quarter.

Infosys’s headcount dropped by 3,611 employees in the March quarter, although attrition reduced by 3.4 percentage points to 20.9%.