Infosys Ltd’s robust Q3 earnings show the company has surpassed Street expectations
Though the December quarter is seasonally weak for Indian information technology (IT) services providers, revenue growth was expected to be strong this time around, helped by deal ramp-ups. Infosys Ltd’s robust December quarter earnings (Q3FY22) show that the company has surpassed Street expectations. Its sequential revenue growth in constant currency (CC) stood at 7% vis-à-vis consensus estimates of 3.7%.
What’s more, the company raised its revenue growth guidance for FY22 by 250-300 basis points (bps) to 19.5-20%. One basis point is 0.01%. True, the Street was expecting Infosys to raise its guidance, but the quantum is far ahead of expectations. This is sentiment-positive, reckon analysts. The increase in revenue growth guidance is a reflection of strong growth delivery, said analysts from Jefferies India Pvt. Ltd in their first cut note.
As such, solid Q3 earnings performance of Infosys is expected to lead to earnings upgrades for FY23. “Currently, our FY23 earnings per share estimate for Infosys is ₹62.7. The higher-than-anticipated revision in revenue growth guidance and strong deal wins gives investors the confidence that the revenue growth for the company would remain robust in FY23," said Kumar Rakesh, senior automobile and technology analyst at BNP Paribas.
In comparison, peer Wipro Ltd reported muted earnings in Q3 with a sequential CC revenue growth of 3%. Tata Consultancy Services Ltd (TCS) saw CC revenue growth of 4% on a quarter-on-quarter basis in Q3.
In Infosys’ post-earnings call, the management said growth was broad-based across segments and geographies with digital transformation scaling rapidly, especially in the manufacturing business. It said the upward revision in revenue guidance was backed by a robust demand environment and strong deal pipeline. Infosys has signed large deals with a total contract value of $2.53 billion in Q3. The management also said that the pricing environment during the quarter remained stable.
On the operating performance front, Ebit (earnings before interest and taxes) margin of Infosys stood at 23.5% in Q3FY22 compared with 23.6% in Q2. Nevertheless, “(Ebit margin) was also ahead of our and consensus estimates on the back of stronger-than-expected revenue growth," said Jefferies’ analysts. Infosys has maintained its Ebit margin guidance for FY22 at 22-24%, and said that despite supply-side pressures, its margins have been resilient, aided by cost-optimization measures and currency benefits.
However, and importantly, Infosys’ attrition rate was higher at 25.5% in Q3 vis-à-vis 20.1% in Q2. The management said this was an industry-wide issue and that it continues to look at ways to mitigate it with employee retention programmes. According to the management, on a trailing 12-month basis, the attrition looks higher, but there has been some stability on a quarterly basis. It is hopeful that as more freshers enter the industry, the rate of attrition will ease. Infosys will be hiring 55,000 graduates in FY22. With that, the company is set to hire 10,000 more freshers than earlier. “We expect attrition to ease in the next few quarters, giving the company additional lever on operating performance," Rakesh of BNP Paribas, said.
To be sure, the company’s strong performance in Q3 may narrow the valuation gap between Infosys and TCS. “On one-year forward PE, Infosys is trading at a multiple of 29.9 times and TCS at 30.5 times. In the near term we see this gap narrowing further. Return of travel cost and hiring expenses can be risks to margins, which investors need to watch out for," Rakesh said. As of 9.30 pm, American Depository Receipts (ADRs) of Infosys were up 2.4% from the previous day.