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IT leaders Infosys, TCS kick off Q3 earnings season with weak numbers

Infosys cuts growth guidance as net drops 7.3%; TCS profit up 2%

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Illustration: Ajay Mohanty

Shivani ShindeAyushman Baruah Mumbai/Bengaluru
India’s information technology (IT) leaders have once again sent out a signal that the macro environment is tough and that their clients are spending cautiously. 

Kicking off the earnings season on Thursday, the third quarter results of Tata Consultancy Services (TCS) and Infosys reflected the slowdown in the global markets. While attrition has been contained, addition in the workforce has been negligible. Between the two firms, over 11,000 people have left the firms with no substantial addition.    

Infosys, the country’s second largest services player, cut its revenue growth guidance for the third straight quarter. It now expects its revenue for FY24 to grow in the range of 1.5 to 2 per cent, revised from the earlier estimate of 1 to 2.5 per cent growth. TCS does not give any revenue guidance.
 
The country’s second largest IT services company Infosys, headquartered in Bengaluru, posted a net profit of Rs 6,106 crore for the third quarter ended December, showing a drop of 7.3 per cent from the same period last year. The company’s profit was down 1.7 per cent sequentially (quarter-on-quarter), which was below the Bloomberg estimates of Rs 6,167 crore. In what is being described as a soft quarter, TCS’ result was better with a 2 per cent rise in year-on-year net profit at Rs 11,058 crore.

Infosys’ revenue for the third quarter was at Rs 38,821 crore, down 1 per cent year on year in constant currency terms. Mumbai-headquartered TCS reported a revenue growth of 1.5 per cent on a quarter on quarter basis and a growth of 4 per cent on a year-on-year basis. The TCS revenue for the quarter came in at Rs 60,583 crore.

While TCS performance is a beat, according to Bloomberg estimates, a comparison of growth rates establishes a slowdown. In Q3 FY23, TCS reported a revenue growth of 5.2 per cent sequentially and 19.1 per cent year-on-year.

The uncertainly in the client budget spends was evident in the commentary of the top management as well.

“We see no major change in the sentiment from the last quarter. The situation has not changed much. The optimism around interest rates has not resulted in a reduction of the uncertainty that we see in decision making. I don’t think we are ready to say that it will recover by Q4,” said K Krithivasan, CEO and MD, TCS.

Salil Parekh, CEO and MD, Infosys, also made a similar commentary. Responding to a query on client budgets, Parekh said: "The budget process has started and launched formally for many of our clients. At this stage, we do not see any change in dynamics from what we have seen last quarter. We do not see things becoming worse. We will have our view of the next financial year as we come into the March-April time results.”

The Q3 is a seasonally weak quarter for IT companies on account of higher furloughs resulting in lower billable hours.

The softness in the business is quite evident in the industry’s largest market, the US. For TCS, the growth from the US was down 3.1 per cent and BFSI, its largest vertical, was down by 3 per cent. Similarly, Infosys’ growth from the US was down by 4.9 per cent on constant currency basis and 4.7 per cent in reported terms. BFSI, which is also the largest in terms of revenue for Infosys, was down 5.9 per cent in constant currency basis.

With revenue growth in slow lane, the impact can be seen in margins, which has grown majorly on the back of cost optimisation and productivity gains. In the case of TCS, operating margins improved by 70 basis points, and about 60 bps came from productivity and realistion.  Infosys too, saw its margins drop due to salary hikes that the company gave.

Other than BFSI, growth was tepid across sectors like telecommunications and media, hitech and technology services.

When it comes to geography, for both the players, growth was driven by Europe. In case of TCS, it was driven by UK.

However, the signs of a tepid growth for the fourth quarter as well comes from the fact that both the companies continued to see reduction in their headcount even as attrition was at its lowest.

TCS headcount for the Q3 was down by 5,680 and Infosys saw its total headcount drop by 6,101 at 322,663. This is happening even as attrition for TCS and Infosys was at a low of 13.3 per cent and 14.6 per cent respectively.

However, the silver lining of the performance was the total contract value signed, which continued to show a healthy momentum. For TCS the TCV for Q3 came in at $8.1 billion, up 3.8 per cent from $7.8 billion it signed in the Q3 of FY23. On a sequential basis, the TCV was down from the $11.2 billion in the second quarter. Infosys’ TCV of $3.2 billion was down from $3.3 billion in the same period last year.

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First Published: Jan 11 2024 | 11:32 PM IST

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