Infosys reported Q4 results that were below expectations. Revenue of ₹32,276 crore and EPS of ₹13.56 were about 2 and 5 per cent below consensus expectations, respectively. Operating margins disappointed and declined sequentially to 21.5 per cent versus 23.5 per cent in Q3. Street expectations were closer to 23 per cent.
On the positive side, according to management, the revenue hit in Q4 was due to one-off contractual factors. The company saw good year-on-year growth across all business verticals and geographies. Amongst the large IT players, Infosys is one of the few companies that gives clear details on revenue performance split between digital and legacy business. In Q4, this segment accounted for 59.2 per cent of total revenues and grew 38.8 per cent in cc terms, making up for all the growth at full company level.
Further, the outlook remains strong backed by strong deal momentum. The company has guided for constant currency (cc) revenue growth of 13-15 per cent in FY23, on top of a solid 19.7 per cent growth delivered in FY22 (best performance in a decade). As of now, the company is not seeing any impact due to macro (global inflation, lower-than-expected GDP growth) or geopolitical risks.
One thing to watch out for will be the elevated levels of attrition as companies engage in a war for talent. Last 12 month attrition was high at 27.7 per cent, versus 25.5 per cent in Q3, and 10.9 per cent at the same time last year. These and few other costs like marketing and travelreverting to pre-Covid levels explain some of the margin impact. The management has guided for FY23 operating margins at 21-23 per cent versus 23 per cent in FY22
Key takeaways
It needs to be noted that the company’s performance was largely within the management’s guided range.
However, given the fact that Infosys had been consistently reporting beat and raise quarters post initial impact of the pandemic in Q1 FY21, these results will be a disappointment as the markets had got accustomed to positive surprises from the company.
Thus, from a near-term perspective, initial reaction might be negative. At the time of going to press, the Infosys ADR listed in the US was down 5.2 per cent. However, from a fundamental perspective, this miss is offset by the solid business momentum for now. For two consecutive years, Infosys has been outgrowing TCS and this also works in its favour.
Factors to watch out for from long-term investing perspective are any impact to business few quarters down the line if geopolitical factors linger for extended periods; and pricey valuation. Its valuation at one year forward PE of 27.6 times in an increasing interest rate environment is expensive.