Infosys logs less-than-expected 3.2% rise in net profit for Q1; raises revenue outlook

New Delhi: India's second-largest IT services firm Infosys on Sunday reported a lower-than-estimated 3.2 per cent rise in June quarter net profit amid escalating costs, but surprised by raising its full-year revenue growth outlook to 14-16 per cent citing strong demand and robust deal pipeline.

Net profit of Rs 5,360 crore, or Rs 12.78 a share, compared with Rs 5,195 crore, or Rs 12.24 per share, in the same period a year back, according to the company's regulatory filing. Sequentially, the profit declined 5.7 per cent from Rs 5,686 crore in January-March quarter.

While the net profit fell short of street expectations of 5.5-9.5 per cent growth, Infosys surprised investors by raising its revenue growth guidance to 14-16 per cent from 13-15 per cent for the fiscal year ending March 2023.

Higher employee benefit expenses, sub-contracting costs, and travel expenses, pushed up overall costs for Infosys in just-ended ended quarter.

The earnings of the Bengaluru-headquartered firm -- which competes with Tata Consultancy Services, Wipro and others in the market -- comes at a time when elevated levels of attrition leading to higher employee costs are denting the profitability of the IT industry.

Infosys' revenue or turnover stood at Rs 34,470 crore in the first quarter of current fiscal, which was up 23.6 per cent compared to Rs 27,896 crore a year ago. Seen sequentially, the revenue was up 6.8 per cent from Rs 32,276 crore logged in January-March period.

"With strong growth in Q1 and our current outlook on demand, opportunity and pipeline, we increased our revenue growth guidance which was 13-15 per cent to 14-16 per cent growth this year. We keep margin guidance at 21-23 per cent, and with an increased cost environment we will be at lower end of margin guidance," Salil Parekh, the CEO and MD of Infosys, said briefing reporters.

Revenue in dollars terms stood at USD 4.44 billion, up 3.8 per cent on a quarter-on-quarter basis and ahead of analysts' expectation of 3.3 per cent growth.

Its growth in topline in constant currency terms - or revenue excluding the forex impact - came in at 5.5 per cent, better than street estimates as well as its peers.

"Our growth continued to be broadbased across business lines, geographies, and segments. Each of our business segments grew in double digits with several of them growing at 25 per cent or higher," Parekh said.

The US market - the largest and the most lucrative pie for export-led Indian IT sector - grew at 18.4 per cent and Europe grew "very strongly at 33.2 per cent".

Infosys' large deals stood at USD 1.7 billion in Q1, which comprised of 19 large deals.

"We are gaining market share, are significantly ahead, leading the industry in growth, primarily from positioning of our capabilities which are resonating with our clients both on digital and cloud," Parekh informed.

Digital accounted for 61 per cent of overall revenues, growing at 37.5 per cent in constant currency.

Operating margin declined to 20.1 per cent in the first quarter of current 2022-23 fiscal when compared with 23.7 per cent margin in April-June 2021 and 21.5 per cent in January-March.

Operating expenses rose 14.4 per cent, most as selling and marketing cost went up. Attrition rose to 28.4 per cent in June 2022 quarter from 27.7 per cent in the previous sequential quarter. Net hiring was strong at 21,171, Infosys said.

Retaining employees is leading to cost pressure on IT companies, impacting their margins.

"We are fueling the strong growth momentum with strategic investments in talent through hiring and competitive compensation revisions. While this will impact margins in the immediate term, it is expected to reduce attrition levels and position us well for future growth," Nilanjan Roy, Chief Financial Officer said.

The company, he said, continues to optimise various cost levers to drive efficiency in operations.

Infosys said it clinched record hiring of 21,000 this quarter, higher than any of top five peers in the industry. Compensation hikes impacted margins by 160 basis points, and utilisation dipped due to impact of new freshers coming in.

The company, however, asserted that these were more in the nature of "investments" given the robust demand scenario, and assured it will be looking at cost optimising levers such as better utilisation, and more automation. Pricing is another such lever and those discussions are on, the company added.

Asked about widespread concerns about global recession and high inflation, Parekh asserted that "demand outlook is good" and "pipeline for large deals is larger than what we had in last 3-6 months".

"We are cognizant of what the macro environment is, but that is not what is driving day to day... we see the pipeline and are making sure we are agile and can adapt," Parekh said. He admitted that there are some pockets of softness such as the `mortgage' space but emphasised that "the overall pipeline is strong".

"...at this stage, we are watching out for what can happen as the environment evolves and changes," Parekh said.

The company is seeing a strong traction with large clients, working on big digital and cloud transformation programs. Deals in the pipeline include growth side and cost side contracts.

While rupee revenue rose 6.8 per cent sequentially, EBIT at Rs 6914 crore was lower than estimates.

All major business segments, including financial services witnessed growth, and verticals like energy, and utilities, manufacturing, and communications saw the biggest jump year-on-year. North America remained the biggest business generating region accounting for 61.8 per cent of the total revenues, followed by Europe (25 per cent). India operations generated 2.6 per cent of the revenues for Infosys.

"Our strong overall performance in Q1 amidst an uncertain economic environment is a testament to our innate resilience as an organisation, our industry-leading digital capabilities and continued client-relevance," Parekh observed.

Infosys, he said, is investing in rapid talent expansion while ensuring rewarding careers for employees, to better serve evolving market opportunities. "This has resulted in a strong performance in Q1 and increase in FY 23 revenue guidance to 14-16 per cent," he said.

On July 20, Wipro Ltd reported a 21 per cent decline in June quarter net profit as higher employee-related costs pushed up the firm's overall expenses.

Wipro's consolidated net profit at Rs 2,563.6 crore in April-June (the first quarter of 2022-23 fiscal) was 20.6 per cent lower than Rs 3,242.6 crore net profit in the same period a year back. Seen sequentially, the profit fell 16.9 per cent.

Larger rival and India's biggest software exporter Tata Consultancy Services earlier this month reported a 5.2 per cent rise in the June quarter net profit to Rs 9,478 crore, restricted by the impact of annual wage hikes and promotions that took operating profit margins to multi-quarter lows.