Despite the recent good quarter that the Indian IT services major Infosys witnessed after a long gap, many experts are of the view that it is too early to conclude that growth has returned to the company and the sluggish pace is over.
According to some experts, many contracts are up for renewal and it would be worth seeing as to how the company performs over the next few quarters. There is also a concern among investors about how Infosys will manage the high manpower costs due to Verizon deal that will see the transition of around 1,300 employees to Infosys.
“Though Infosys has had a good quarter after quite some time, the market view on Infosys is pessimistic. The analysts are concerned about the increased manpower costs. The biggest element is the use of 'sub contractors', specifically overseas. Given that Infosys is focusing more and more on digital revenues, the market is worried about the shrinking margins in the digital business. The other element is the possibility of some banking contracts being lost. Overall, Infosys, in its drive for growth, may find that it has to compromise on margins,” Kris Lakshmikanth, CEO and founder of the executive search firm Head Hunters India Limited, said.
Another expert, Alok Shende of the Mumbai-based Ascentius Consulting, is also of the opinion that though Infosys is developing stronger portfolio of offerings in the digital space, it has a long way to go. “Infosys CEO Salil Parekh is from a services background and understands the market better, but the organisation still needs fine tuning to increase its reach in the digital space. Ideally, we should look for the next two or three quarters to gauge the real performance of the company. It took a company like TCS close to two years to do well in the digital business and Infosys will also have to transition towards that space gradually. There are a few contracts that are up for renewal and we would need to see how the company performs there. This present quarter has been good for the company due to the deals and the the order booking of over $2 billion in the quarter,” Shende told THE WEEK.
Experts from HDFC securities are of the view that during the last quarter, BFSI and Retail powered the revenue of Infosys that had posted a healthy growth of 5.8 per cent QoQ (quarter on quarter) and 5.9 per cent QoQ. “Demand outlook is expected to remain strong with Continental Europe expected to lead the race, followed by the US and Australia Geographical. The next quarter (Q3) for the company is expected to be impacted by furloughs and transition impact of large projects. The company management maintained the revenue growth guidance and margin guidance for FY19E at 6-8 percent YoY and 22 to 24 per cent respectively. Besides, this the announcement of $ 1.4bn one-time payout (dividend or buyback) will support valuations,” said Apurva Prasad, senior analyst, HDFC securities.