Infosys Q1 net profit falls 4%; Vishal Sikka says ‘headwinds unanticipated’

The Bengaluru-headquartered firm reported the lowest volume growth in the last five quarters of 2.2%, in an indication the demand environment may be softening. Moreover, the increasing commoditisation of the business appears to be pressuring prices which fell 0.2% in Q1FY17. Consequently, sequential revenue growth of 2.2% in dollar terms to $2501 million came in well below consensus expectations of around 4.2%, in a quarter that is typically the strongest for IT firms.

Infosys expects pricing pressure to persist and attributed the muted performance to weaknesses in the energy and life sciences verticals and also rising visa costs and wage hikes. The IT firm said the lowered revenue guidance was on account of a slow ramp-up of certain large deals it had bagged in the last quarter. Analysts at JP Morgan observed the lowered guidance was the result of a sluggish start but it was not clear if any buffers had been built in to cushion the fallout of Brexit.

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Infosys’ guidance suggests the company will perform in line with industry — Nasscom had put out a forecast of 10-12% for FY17. Tata Consultancy Services (TCS) on Thursday reported a revenue growth in dollar terms of 3.7% sequentially on the back of a 3.4% rise in volumes. While TCS reported an Ebit margin for Q1FY17 of 25.1%, Infosys reported an Ebit margin of 24.1% , a fall of 140 basis points sequentially. Both firms were hit by wage hikes — Infosys by 1.4% and TCS by about 2%.

However, while TCS reported lower attrition in the June quarter, for Infosys the attrition rose to 21%, up 3.7% sequentially. Infosys COO UB Pravin Rao attributed this spike to the seasonality of the period and said the company was not unduly worried.

After over a decade, Infosys has decided to roll out its restricted stock unit plan for eligible and high-performing employees.

JP Morgan noted that although Indian IT players were bringing in significantly more automation in their delivery, due to competitive pressures they could end up giving large parts of the benefits back to clients in the form of lower pricing, thus limiting margin benefits.

Expressing disappointment over the results, Infosys CEO Vishal Sikka said the firm had not anticipated headwinds in discretionary spending in consulting services and package implementation. “We had also not expected slower ramp-ups of large deals that we had won in the earlier quarters,” Sikka said. However, he brushed aside any major impact of Brexit, saying that while there was near-term uncertainty, it was too early to assess the actual impact.

The modest revenue growth was attributed to client-specific issues; the management said the ramp- up of large deals in the healthcare space and that of a European client had been slow. Revenues in rupee terms stood at Rs 16,782 crore for the June quarter, a sequential growth of just1.4%. Net profit in rupee terms declined by 4.5% to Rs 3,436 crore.

Infosys CFO MD Ranganath said the company is expected to maintain the operating profit margin in the 24-26% range. Cost optimisation measures would be taken to help sustain margins as would lower sub-contracting expenses, he said.