Margin recovery likely an uphill task for Infosys after Q1 shock

• Infosys reported a sequential decline in its net profit in the June quarter as high wage hikes weighed on it.
• This caused Infosys’s EBIT margin to spiral down to the lowest point in the last two years.
• Nomura has also lowered its earning per share (EPS) expectation by 1-3% for the next two fiscal years.

India’s second largest IT services company Infosys reported a sequential decline in its net profit in the June quarter, as the high wage hikes weighed down on its margins.

Infosys’s EBIT (or earning before interest and taxes) margin declined to 20.1%, the lowest in the last two years. The decline was due to multiple factors, including wage hikes, lower utilization and higher sub-contracting expenses, some of which will continue to impact the company in the ongoing September quarter as well.

Brokerage firm ICICI Securities is of the view that the increase in travel costs, wage hikes for senior employees in Q2FY23 and supply-side cost pressures will weigh on Infosys margin. Nomura believes that the impact of wage hikes may be limited, while improvement of utilization and effects of price increases in contracts are likely to be gradual.

The company has retained its EBIT margin at the lower end of 21-23% range, triggering brokerage firms like ICICI Securities and Nomura to cut their forecasts to 21% as well.

“Recovery in FY24F will be driven by pyramid optimization, lower sub-con [subcontracts] as travel normalizes and some benefits from price hikes in renewals and new deals,” Nomura added.
Source: Company Data, Nomura
Note: ‘F’ in the table stands for Forcast.

Nomura has also lowered its earning per share (EPS) expectation by 1-3% for the next two fiscal years, factoring in lower margins, partly offset by better currency. Infosys’ competitor Tata Consultancy Service (TCS) is expected to outperform in this domain.

Infosys’ revenue witnessed a sequential growth of 6.8% in the June quarter as its revenue stood at ₹34,470 crore. Meanwhile, the constant currency revenue growth stood at 5.5% sequentially and 21.4% year-on-year. The company has increased its revenue guidance for FY23 to 14-16% — up from the previous guidance of 13-15% — despore the supply side challenges and high travel costs.

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“We continue to gain market share and see a significant pipeline driven by our Cobalt cloud capabilities and differentiated digital value proposition,” said Infosys CEO and MD Salil Parekh, sounding a bullish tone for the rest of FY23.

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