India’s Infosys misses profit estimates in Q2 as costs surge

India’s Infosys Ltd on Sunday reported June-quarter profit that missed estimates, hurt by higher employee expenses, but the IT services company raised its annual revenue outlook, citing a strong demand outlook.

Infosys’ larger IT rival Tata Consultancy Services and also smaller rivals such as HCL Technologies and Wipro have seen their margins erode as they battle a higher sector-wide talent churn and try to retain employees.

Overall expenses surged more than 29%, while operating margins for Infosys for the June quarter came in at 20.1%, down 3.6% year-on-year. The company also retained its operating margin guidance for full year at 21%-23%.

The company was making investments in talent through hiring and competitive compensation revisions, which will impact margins in the immediate term, Nilanjan Roy, chief financial officer, Wipro said in a statement.

However, Bengaluru-based Infosys expects revenue growth of 14%-16% for the financial year to March, slightly up from its view of 13%-15% forecast in April.

“We see good volume growth, good pipeline of large deals and that gives us the confidence for increasing revenue guidance,” chief executive officer Salil Parekh said in a media call.

Infosys saw its large deal signings dropping about 35% to $1.7 billion rupees, while gross addition of clients during the quarter dropped to 106 from 113 a year ago.

But chief executive Parekh said the company was seeing good traction with large clients.

Consolidated net profit for Infosys rose 3.2% 53.60 billion rupees ($12.5 million), but missed analysts estimates of 56.26 billion rupees, according to Refinitiv data.

The April-June quarterly earnings reports have started on a weaker note for Indian IT services companies, with TCS, HCL Technologies and Wipro also missing their first-quarter profit estimates.

Revenue from operations for Infosys jumped 24% to 344.70 billion rupees.

The IT spending in India is likely to reach $114.9 billion in 2022, growing 7.7 per cent from last year, a Gartner reports said recently.

Global economic uncertainty continues to be an area of concern for the Indian enterprises.

Indian IT spend is expected to maintain robust 7.7 per cent growth in 2022 as compared to 2021 growth rate of 21.2 per cent.

While IT spending is expected to grow, it will be at a much slower pace than 2021 due to spending cutbacks on PCs, tablets and printers by consumers, causing spending on devices to shrink 5 per cent worldwide.

The global IT spending is projected to reach $4.5 trillion in 2022, an increase of 3 per cent from 2021, according to the latest forecast by Gartner.

Organisations that do not invest in the short term will likely fall behind in the medium term and risk not being around in the long term, he added.

The critical IT skills shortage being felt across the globe is expected to abate by the end of 2023 when the corporate drive to complete digital transformations slows down and there has been time for upskilling and reskilling of existing staff.

However, in the near term, CIOs will be forced to take action to balance increased IT demand and dwindling IT staffing levels.

Consumer IT spending: The consumer IT spending in the Asia-Pacific region, already taking the brunt in the ongoing tight market conditions, is set to further slide in 2023, depending on the severity of the economic slowdown, according to an IDC report.

The risk of recession worldwide has continued to rise amid increasing inflation and the expectation of a tightening monetary policy.

The rising inflation is driven by ongoing supply chain constraints, geopolitical tensions, growing food and energy prices, and early 2022 lockdowns in China.

The second-order impact of these disruptions on Asia-Pacific economies is now being felt, the report mentioned.

“One in two businesses in the region expect that IT cost price increase stemming from inflation will impact their spending plans for the rest of 2022,a said Vinay Gupta, Research Director, IT Spending Guides, IDC Asia/Pacific.

“If the situation persists, businesses will either delay projects or adjust spends to focus on strategic initiatives essential for future business functions and needs,” he added.

However, demand from enterprises and service providers for IT investments remains stable so far in Asia-Pacific.

Any further worsening of the financial situation will also impact enterprise and service providers’ spending.

Consumer IT spending (related to purchase of mobiles, tablets, PCs, wearables, and peripherals) slowed in the first half of 2022 because many device purchases have already happened in the last two years to enable work from home or online classes. According to the report, the expectations were that 2022 would not be that great a year.