Infosys posts 11% jump in net profit, ups guidance

India's second-largest IT services company, Infosys Ltd., beat market expectations in its dollar and rupee net profit and revenue figures in the second quarter of fiscal 2022-23 on the back of a weakening rupee, even as it raised its guidance for the full fiscal and approved a significant share buyback.

The company posted a growth of 11.1% in its net profit for the second quarter (Q2) of financial year 20221-23 (FY23) to touch Rs 6,021 crore compared to Rs 5,421 crore posted a year ago. Infosys witnessed a rise of 23.4% in rupee revenue, to Rs 36,538 crore versus Rs 29,602 crore. Its dollar revenue rose 13.9% to $4,555 million compared to $3,998 million y-o-y. The company reported a constant currency growth of 18.8% y-o-y on the back of strong digital services growth, at 31.2% y-o-y.

The company also raised its lower end for FY23 revenue guidance but lowered the upper end for Ebit (earnings before interest and tax) margin guidance. It has now guided for 15-16% (from 14-16%) CC (constant currency) revenue growth and 21-22% (from 21-23%) for this fiscal. Infosys has also approved a share buyback, its fourth since 2017. According to the company’s board meeting outcome on BSE, Infosys will buy back up to 50,270,270 shares (1.19% equity) at a maximum price of Rs 1,850 apiece, aggregating the whole value of the buyback at Rs 9,300 crore. The buyback price of Rs 1,850 is at a 30% premium to the stock’s Thursday’s closing price of Rs 1,419.75 apiece.

For Infosys, Large deal TCV (total contract value) came in at a 7-quarter high, at $2.7 billion. The company added 1 new 100 million+ and 8 new $50 million+ clients to its portfolio compared to the same period last year.

“Our large deal wins and all-round growth in Q2 reflect the relevance and differentiation of our digital and cloud solutions for clients. While concerns around the economic outlook persist, our demand pipeline is strong both on the growth and efficiency of their businesses. This is reflected in our revised revenue guidance of 15-16% for FY23,” said Salil Parekh, managing director and chief executive officer, Infosys.

Analysts said Infosys’ second quarter performance has surpassed market expectations. Omkar Tanksale, senior research analyst at Axis Securities, said, “We had expected an improvement of 40 basis points in operating margins, while Infosys delivered 140 basis points of improvement. Even the large deal bookings have been strong. Cloud transformation remains resilient, and enterprise expenditure in this sector will continue despite economic uncertainties.”

Tanksale added that so far, there are no spending cuts from most of Infosys’ clients, leading analysts to remain bullish on the company’s performance in H2FY23. “Sectors such as banking, financial services and insurance (BFSI), manufacturing and other verticals have steadily become more system driven, as opposed to adopting IT services solely for cost optimizations — thus making the IT sector more resilient,” he said.

Operationally, Infosys’ Ebit showed a rise of 12.9% to Rs 7,873 crore versus Rs 6,972 crore recorded during the same quarter previous year. However, margin, like its peers, has lagged on a y-o-y basis as the sector reels from wage hikes and other cost pressures limiting operating leverage. The IT giant reported an Ebit margin of 21.5% for the September quarter versus 23.6% y-o-y.

However, the Bengaluru-headquartered company has reported an attrition of 27.1%, higher than its peers like TCS, Wipro and HCL Tech, all of which reported a number sub 24%.

The BFSI sector continues to dominate IT services companies’ revenue for the September quarter and Infosys was no exception, with the sector contributing 30.5%, followed by retail (14.2%), communication (12.3%) and so on. Among geographies, the North American (NA) market led with nearly 62.5% share of the revenue coming from there. Europe followed with a 24.7% share, followed by the rest of the world (9.9%) and India (2.9%).

It's been a mixed bag for IT services companies in the July-September quarter. The Indian rupee fell 10% YoY in the September quarter, which helped these companies that earn most of their revenue in US dollars. India's largest IT services company Tata Consultancy Services (TCS) too beat analyst expectations to post 8.4% YoY growth in its net profit to ₹10,431 crore, and also posted a 15.4% rise in its order book, which for the second quarter of this fiscal, stood at $8.1 billion. Wipro reported a 12.9% YoY growth in IT services' revenue but its net profit fell 9.6% to ₹2,649 crore. HCL Tech, on its part, reported a 7.1% YoY rise in net profit to ₹3,489 crore and upped its guidance.

Analysts, however, cautioned of a potential slowdown due to global headwinds, particularly in north America, in the coming quarters.

Akshara Bassi, research analyst for global cloud and servers market at Counterpoint India, said, “There are very fine signs of weakness — for instance, the number of clients added during the quarter dropped to 103 from 117 in Q2 last year, a near-12% drop. This shows signs of a potential slowdown, and the western markets including North America could fall further.”

Bassi said that with a new round of US federal interest rate hikes, the global markets could see a slowdown in deal realization in the coming quarters. “Even with the $2.7 billion worth of large deal bookings, there was no time period forecast given. These deals typically do not see realization in the immediate quarters, so it remains to be seen how they add up to the company’s revenue going forward,” she added.

However, even as the global market continues to slow down, analysts do not expect smaller, emerging markets — such as India — to play a significantly larger role in the overall performance. Tanksale said that while India’s demand for IT services due to digital transformation mandates may see an exponential increase, it will likely not add up to a significantly larger market share for Infosys than the 2.9% contribution that Indian clients made to Infosys’ order book this quarter.

Parekh, however, said at the press conference that the company remains “extremely bullish” on India’s digital transformation demand. “We have done multiple mission critical projects in India, for instance on the union government’s Goods and Service Tax (GST) program that has led to tremendous realization and increase of collection through the digital implementation of a new platform. We are well positioned to scale digital transformation programs in India, with government organizations and private companies in this area,” he said.

Infosys also announced an interim dividend of Rs 16.50 per share.

On a sequential (q-o-q) basis, the company saw a rise of 12.3% in its net profit along with a 2.5% growth in dollar revenue and 6% growth in rupee revenue. Its operational profit rose 13.9% for the Sep quarter on a quarter-to-quarter basis while margin 140 basis points. “Operating margin in Q2 expanded sequentially by 150 bps, helped by our operational rigour. While supply side challenges are gradually abating as reflected in the reducing attrition rates, they continue to exert pressure on our cost structure,” said Nilanjan Roy, chief financial officer, Infosys.