One of the biggest challenges before India’s second largest software services company is the departure of top talent. At least 20 senior executives at the senior vice president (SVP) level and above have left the company since Salil Parekh took over as CEO in January 2018.
In response, Infosys has embarked on its largest-ever promotion drive, promoting the same number of executives to senior management positions since early last year. While this may not directly address the root causes of the layoffs, it does highlight the company’s efforts to rebuild leadership stability.
Other major challenges are the lack of mega deals (deals over $1 billion) and the declining number of employees under 30 years of age.
Two Indian information technology (IT) services companies have so far reported results for the December quarter, but key metrics were in line with analysts’ expectations, despite fewer business days and a seasonal downturn for the industry. below.
India’s largest IT services provider, Mumbai-based Tata Consultancy Services, opened the ongoing earnings season with revenue slightly lower than expected and its lowest third quarter in nine years. reported the growth rate.
The company reported revenue of $7.54 billion for the quarter, down 1.7% from the previous quarter. However, TCS’s net profit was in line with analyst estimates, increasing 2.6% sequentially to $1.46 billion.
At Noida-based HCL Technologies Ltd, India’s third largest IT services company, the plot has reversed. The company beat analysts’ expectations in terms of both sales and net income. HCLTech reported revenue increased 2.6% sequentially to $3.53 billion and net income increased 7.5% to $544 million. Still, this was HCLTech’s lowest third-quarter growth in five years.
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However, the stock performance of both companies belied their financial statements.
On Friday, TCS stock rose 5.7%; INR4,265.55 per share. Meanwhile, HCLTech stock fell 9% on Tuesday; INR1,813.95 per share.
Against this backdrop, Mint highlights five things to watch as Infosys releases Q3 results.
1. Sales and growth rate outlook
A Bloomberg survey of 25 analysts estimates that Infosys’ sales will decline by 1.7% going forward.
This means that Infosys is in the same position as its larger peer TCS in terms of declining revenue. The drop in revenue will come as a shock to investors who were hoping Infosys would end the year on a strong note on the back of strong trading in the first half of the financial year.
In April last year, Infosys set an initial target of 1-3% full-year growth at constant currencies for the fiscal year ending March 2025. On the back of record numbers, it has raised its forecast to at least 3% by July. Large trade wins and more favorable macroeconomic outlook.
The company subsequently revised its growth forecast further to the upper limit of 4.5% on a constant currency basis. However, the outlook for a decline in sales casts doubt on full-year growth, and comments from management are awaited.
“We believe Infosys should be a part of investors’ portfolios for the global macroeconomic recovery as we believe it will be a key beneficiary of discretionary demand pickup and GenAI adoption.” said Kumar Rakesh, associate director of equity research at BNP Paribas. Memo dated January 3rd.
2. Major regions and industries
North America is the biggest cash cow for India’s largest software services company. While TCS’ business declined in the region, HCLTech’s growth was driven by customers in the Americas.
For Infosys, about 57% of its business comes from customers in North America, and investors are expected to keep an eye on the region, particularly the United States, where President Donald Trump takes office later this month. The company is less reliant on H-1Bs (immigrant work visas) than it used to be, but management will likely be more cautious about its policies once President-elect Trump takes office.
Banks and financial institutions are the largest revenue contributors for IT service providers. While TCS saw a sequential decline in banking revenue, HCLTech saw a marginal increase in financial institution revenue. Investors will be watching closely to see how Infosys performs in this important area, which accounts for nearly a third of its total revenue.
3. Why is Infosys TCV important?
Mint typically does not consider Total Contract Value (TCV) as a metric to compare a company’s financial performance. This is simply due to two main reasons.
First, each company has a different definition of TCV. Second, the incremental revenue that a company reports is not the same as the TCV and can be much larger than the actual revenue increase.
One of the reasons for the still strong stock price performance for TCS is that TCV was $10.2 billion, up 19% QoQ. The Mumbai-based company recorded this growth even though its TCV included all deals and there was not a single mega deal. Investors will be keeping a close eye on Infosys’ TCV this quarter to weigh its performance.
4.Employed engine
Recruitment is considered a growth indicator for IT services companies, as an increase in the number of hires typically indicates increased demand for IT services.
Infosys added headcount in the September quarter, increasing its headcount by 598 people in the first half of the financial year.
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In the three months to December, Infosys’ peers have shown mixed results, indicating that uncertainty around demand remains in the air. HCLTech added 2,134 employees, while TCS reduced its headcount by 5,370. The company’s headcount performance will be a key focus for analysts in its upcoming earnings.
5. Will Infosys keep its promise to increase wages now?
Another factor boosting growth is that wage increases have been postponed to January this year, much later than the usual June-August period.
For its 300,000-strong workforce, which makes up the lion’s share of the cost pie, deferring salary increases is a way for software services companies to shore up operating profits as demand for IT services slumps.
The last time the company decided to raise wages was in November 2023. Wage increases are essential for two reasons. Firstly, it improves employee retention and morale, and secondly, it impacts the broader demand environment.
Also read: Indian IT services companies abandon dependence on H-1B visas
Price increases depend on demand, so if demand for IT services is good, price increases will also occur. The year that Infosys failed to raise wages was also the year in which Salil reported its lowest growth rate since he became chief executive.
