Infosys projects bleak market to continue this year with paltry growth guidance

New Delhi/Bengaluru: IT services major Infosys Limited outlined its slowest growth guidance ever at the start of a financial year, expecting to grow its revenue 1-3% in constant currency terms in the current fiscal (FY25).

The dim guidance comes on the back of its weakest-in-history full-year dollar-revenue growth of 1.9% for FY24, driven by revenue declines in its biggest business banking, financial services and insurance (BFSI), as also from its biggest region, North America.

Its previous slowest growth of 3% was in the year ended March 2010. In constant currency terms (which eliminates the effect of currency movement), Infosys’s FY24 revenue growth came in at 1.4%, lower than the 1.5-2% guidance it had given in January.

While declaring its fourth-quarter and full-year earnings on Thursday, the company said its Q4 (January-March 2024) revenue slipped sequentially by 2.1%, hurt by lower demand from US businesses and from banks.

Investors gave a thumbs-down to the results. In pre-market trading at the New York Stock Exchange, Infosys’s shares were down 8.3% to $15.56. The results were declared after market hours in India.

However, the performance did not stop the company from announcing its largest acquisition yet on Thursday, a $480-million buyout of In-Tech, a German engineering research and development firm. In-Tech had $181 million in revenue last year and Infosys expects to close this acquisition in the first half of the current fiscal.

Infosys’s CEO Salil Parekh clarified to a question from Mint that the company’s stated guidance for FY25 does not include the revenue growth that will be added from the acquisition of In-Tech, which should bring at least 1% growth to the company’s net revenue in FY25.

Infosys’s performance pales in comparison with market leader Tata Consultancy Services Ltd. Infosys ended FY24 with net revenue of $18.56 billion, with $350 million in incremental business. Comparatively, TCS added $1.15 billion in new business to end FY24 with $29.1 billion in revenue.

A Bloomberg poll of 45 analysts had predicted FY24 revenue of $18.5 billion and net profit of $2.94 billion from Infosys. The company’s FY24 net profit of $3.17 billion, a 6.2% rise from the year-ago period, beat this prediction.

In the March quarter, revenue topped $4.56 billion, down 2.1% sequentially and unchanged from the year-ago period. And net profit rose 30.6% sequentially (and 28.7% y-o-y) in Q4 to $959 million, higher than another Bloomberg estimate of $739 million by 32 analysts.

The improved profitability was on account of a one-time $232 million income-tax rebate and a reversal of $5 million net tax provisions.

Excluding this tax largesse, Infosys’s FY24 net profit declined 1.7% compared to the year-ago period. The company’s operating margin was 20.7% at the end of last financial year, compared to 21% in FY23.

Analysts were disappointed. “We’d initially expected a flat end to the previous financial year, but that ended with a 2% sequential revenue decline. Even if recovery of business begins from the June quarter itself, this would mark a setback for Infosys’s revenue growth in FY25,” said Apurva Prasad, vice-president of institutional research at brokerage firm HDFC Securities. “We had initially expected better revenue growth guidance for this year, but a slightly higher slowdown in discretionary spends seems to be affecting Infosys.”

“Some of the industries will see some changes—we see a better buying scenario in the financial services industry, and we expect a slightly slower growth in the next financial year for manufacturing—even though it will grow,” said CEO Parekh, under whose watch Infosys has now posted four straight quarters of muted performance.

Discretionary digital transformation projects are key for IT services firms to grow, since they allow companies such as Infosys and TCS to garner higher margins from clients. Higher discretionary deals and consistent conversion of such deals to revenue are also taken to be positive macroeconomic indicators, which remains weak going into this financial year.

BFSI, which accounted for 29% of Infosys’ revenue in FY23, saw an 8.4% year-on-year revenue drop in FY24 to now account for just over 26% of the company’s revenue. In terms of geographies, North America—which accounted for nearly 60% of Infosys’ revenue—saw a 2.1% revenue decline for the year. These marked the biggest factors for Infosys’s bleak FY24.

Manufacturing and hi-tech registered the highest growth for Infosys in FY24 in terms of verticals, growing 9% and 9.8%, respectively. Geography-wise, the company’s revenue was largely driven by its European market, which grew 6.5%.

Another worry in Infosys’s performance was the company’s sharpest decline in headcount: Infosys ended the year with 317,240 employees, a decline of 25,994 employees. This decline was twice that of TCS, which employs almost two times the number of people employed by Infosys.