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The demand environment has improved, especially in financial services, where it is clearly visible, according to Infosys. Discretionary spending has also increased in pockets, though it has not come back to the extent that the company would like. Maintain buy on the stock.
In the US, the pickup in demand has been broad-based, which has led to Infosys growing faster in the US versus Europe in the past two quarters. While Infosys has been engaging with clients on next year’s budgets, the management indicated that it is still too early to comment on how they will look like.
But they have not seen any signs yet that indicate the budgets will be delayed. Also, regardless of the overall budgets, offshoring spending by clients will be better, according to Infosys. The company indicated that despite the improvement in the demand environment it’s near-term revenue growth will still be choppy.
Management indicated that the challenges to growth were more internal rather than external, as it would take time for the company to absorb the recent organisational changes.
Infosys is not planning to recoup the earlier levels of margins given the dual wage hikes and the pricing correction that has happened.
The company sees opportunities to increase margins in two ways:
1) Optimisation of G&A and sales support: This is the low hanging fruit since it is easy to do. However, there won’t be significant upside to margins from this lever as the levels of G&A as a percentage of revenues are already low (~6% of revenues). In the near term, this is likely to be the driver of margin improvements.
2) Productivity improvement: Infosys sees bigger returns from this lever, by increasing offshore revenue mix and reducing onsite costs by right sizing role ratios. However, these changes are likely to be gradual and over the medium to long term, as internal teams have to be comfortable with the changes.