Infosys caps dull second quarter for Indian IT
Infosys Ltd reported its slowest second-quarter performance in at least a decade on Friday, capping a modest quarterly outing for the country’s five largest tech services firms. The company's ADRs (American Depositary Receipts) tumbled on the New York Exchange, as India's second-largest information technology (IT) services firm dialled down its revenue guidance for the year.
Infosys ended the July-September period with $5.15 billion in revenue, marginally below a Bloomberg poll estimate of $5.18 billion. Three-fourths of the revenue growth—up 1.24% sequentially and 1.3% from a year earlier—came from energy, utilities and resources firms, which make up more than a tenth of its business.
With this, the country’s five largest tech services have clocked their slowest second quarter growth in three years. Tata Consultancy Services Ltd, HCL Technologies Ltd and Tech Mahindra Ltd ended the quarter with $7.64 billion, $3.72 billion, and $1.69 billion in revenue, up 0.24%, 2.03%, and 1.99% on a sequential basis, respectively. Wipro Ltd reported a decline in revenue at $2.61 billion, down 0.11% sequentially.
At least three of the Big Five, including TCS, HCL Tech and Wipro, have reported their worst second-quarter growth in three years. Much of this can be attributed to an uncertain demand environment marked by tensions in West Asia, which is forcing clients to pull back on non-essential tech spending. Rise in automation tools is also forcing companies to pass on savings to clients, pressuring revenue.
The management pointed to the challenging macroeconomic environment, hinting at rising competition and increasing client demand to save costs using artificial intelligence (AI).
“Now, the macro environment is also equally in a place where there are continuing different wars. There were some interest rate increases. There was also the 10-year yield, which is now neighbouring to 5%, and there's continuing some element of tariffs, which creates a different type of an environment for the global economy, and therefore for the type of clients that we work with, which is essentially the Global 2000,” said Salil Parekh, chief executive officer (CEO) of Infosys, during the company’s post-earnings press conference on Friday.
The Infosys commentary matches that of three of its peers. Earlier this month, TCS and Wipro’s management said the demand environment remains unchanged, adding that non-essential tech spending is under scrutiny, whereas HCL Tech’s management said the demand environment remains fluid as it is influenced by various factors. Tech Mahindra’s CEO was more optimistic, stating that the argument around deflationary headwinds was overblown.
Infosys lowered its full-year revenue growth guidance to 1-2% in constant currency terms, from 1.5-3% growth estimate outlined in the preceding quarter. This is its lowest full-year guidance issued in the second quarter in at least seven years. Constant currency does not take currency fluctuations into account. Investors took note, with the company's ADRs trading 5% lower at 8:15pm IST.
The muted results come ahead of a leadership change, with Ashiss Kumar Dash replacing CEO Parekh next April at the end of a nine-year tenure.
The company may just have to buy growth as its organic revenue may have declined.
“Assuming acquisition contribution remains at around 170 bps (basis points), the revised guidance implies an organic growth midpoint of around -0.2% versus 0.5-0.6% earlier. While Q2 performance was broadly in line with expectations, the guidance cut reflects weaker H2 visibility, continued pricing pressure and cautious client spending,” said Manav Medewala, research analyst at Mirae Asset Sharekhan.
Non-essential tech spending among retailers and high-tech companies during the period was lower than expected, said Jayesh Sanghrajka, chief financial officer, Infosys.
This also implies Noida-based HCLTech may grow faster than its Bengaluru peer this fiscal, as it expects revenue growth between 2.5-4% for the full year. To be sure, none of the other three companies share full-year revenue guidance.
Infosys’ first-half revenue rose 2.1% from the preceding year to $10.28 billion.
This comes as the company's profitability is under pressure. The company’s operating margins fell 10 basis points to 21% last quarter. Much of this was because of post-sales customer support. This makes Infosys the first of the Big Five to report a fall in margins last quarter.
TCS, HCLTech, Wipro, and Tech Mahindra reported 24%, 18.2%, 16.5%, and 14.8% in operating margins, respectively. While TCS’s margins remained unchanged from the preceding quarter, HCLTech, Wipro, and Tech Mahindra’s profitability rose 130 basis points, 50 basis points, and 40 basis points, respectively.
In terms of headcount, Infosys added headcount by 4,480 to 332,542 employees. Similar to last year, the company plans on hiring 20,000 freshers.
With this, the Big Five had a mixed result. Wipro cut headcount by more than 6,700 whereas TCS, HCLTech, and Tech Mahindra added more than 4,200 employees, 6,400 employees, and 5,400 employees, respectively.
Jas Bardia is a Bengaluru-based business journalist covering India’s information technology (IT) services sector and Global Capability Centres (GCCs). Known for his investigative depth and attention to detail, Jas has a knack for breaking stories on leadership shifts, high-stakes deals, and evolving industry trends long before they hit the mainstream. If the news is anything IT-related, chances are this author has broken it. Before joining Mint in November 2023, Jas honed his financial reporting skills at Bloomberg News in Mumbai, where he covered bonds and currencies following his graduation from the Asian College of Journalism. When he isn’t chasing his next exclusive, Jas is likely scouting the city’s newest culinary spots, cool events, or is immersed in the electric atmosphere of a Bengaluru FC match at the Sree Kanteerava Stadium. Jas has an eye for detail, an ear for history, and a weakness for a great cologne, and values a good conversation as much as a good lead. If you want to talk about your favourite war movie, funny drunk stories, or a supposed “scam”/wrongdoing in a company, get in touch with him at jas.bardia@livemint.com.
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