Infosys Q1 Results: Profit Falls But Deal Wins, Cost Cuts Help Anchor Margin
Infosys Ltd.’s profit dropped even as deal wins and cost-cutting measures anchored the company in a quarter marred with challenges due to Covid-19.
Net profit fell 1.5% sequentially to Rs 4,272 crore in the quarter ended June, according to its exchange filing. Analysts’ estimates compiled by BloombergQuint had pegged the bottom line at Rs 3,941 crore.
- Revenue rose 1.7% over the previous quarter to Rs 23,665 crore—higher than the estimated Rs 22,957 crore.
- Dollar revenue fell 2.4% to Rs 3,121 crore.
- Operating profit rose 8.9% to Rs 5,365 crore.
- Margin expanded to 22.7% from 21.2%.
Infosys has also provided guidance for 2020-21—a practice it shunned in the previous quarter due to Covid-19 uncertainty. It expects a constant currency growth in revenue of 0-2% in FY21 and sees margin between 21-23%.
The April-June period was the first full quarter that captured the impact of business uncertainty from the pandemic. The world’s biggest lockdown to contain the novel virus froze all economic activity, barring essential services. That led to a rise in costs for IT companies as most of their employees worked from home.
The firms also lost billings as they generate most of their business overseas. Bulk of their revenue from clients in financial services, manufacturing and communications was hit. Rival Tata Consultancy Services Ltd., too, saw its profit and margin decline in the first quarter. Smaller peer Wipro Ltd., however, managed to report a rise in bottom line.
Infosys was able to offset that impact by winning new contracts and implementing cost cuts to maintain its revenue and operational profitability. Large deal wins during the quarter stood at $1.74 billion—higher than the $1.65 billion worth of deals it won in the previous three months. The depreciation of the rupee also helped.
“First, was to see how can we avoid cost increases. So we reskilled existing employees instead of hiring for new demand,” said Chief Financial Officer Nilanjan Roy in the post-earnings press conference. “Short term and temporary cuts were done on discretionary work. Travel expenses came down and we cut back on branding, marketing and did some aggressive rate negotiations. We got another 70 basis point benefit from the rupee depreciation.”
These were cost avoidance measures if we hadn’t done we would’ve seen distress on our margin.Nilanjan Roy, Chief Financial Officer, Infosys
Still, the pandemic is posing another layer of challenge for IT firms like Infosys, TCS and Wipro. The companies had been grappling with growing protectionism and rapidly changing demands of clients that were hastening automation before the pandemic.
The year ahead isn’t going to be any easier. Customers are likely to cut back spending as the pandemic will force companies to prioritise critical technologies over initiatives aimed at tech transformation, according to Gartner. Worldwide IT spending is expected to decline 8% over last year to $3.4 trillion in 2020, it had predicted in May.
But Infosys remains optimistic. “Our confidence and visibility for the rest of the year is improving driven by our Q1 performance and large deal wins,” said Chief Executive Officer Salil Parekh in the media statement.
Shares of Infosys closed 6.16% higher before the quarterly results were announced. That compares with 0.05% gain in the benchmark Sensex.