Infosys Q3 results tomorrow: 5 things to watch out for

One of the biggest challenges before India’s second-largest software services company is the departure of top talent. Since Salil Parekh assumed the role of chief executive in January 2018, at least two dozen senior executives at the level of senior vice-president (SVP) or above have exited the company.

In response, Infosys has undertaken its largest-ever promotion drive, elevating a similar number of executives to senior leadership positions since early last year. While this may not directly address the attrition’s root causes, it highlights the company’s efforts to rebuild leadership stability.

Other major challenges are a lack of mega deals (those valued at over $1 billion) and a dwindling count of employees under 30.

The two Indian information technology (IT) services companies that have so far announced results for the December quarter—a seasonally weak period for the sector because of fewer working days—fell short of analysts’ expectations in key metrics.

Mumbai-based Tata Consultancy Services Ltd, India’s largest IT services provider that kickstarted the ongoing earnings season, reported its slowest third-quarter sequential growth in nine years, with revenue a shade lower than expectations.

The company reported $7.54 billion in revenue for the quarter, down 1.7% sequentially. However, TCS’s net profit aligned with analyst forecasts, reaching $1.46 billion—a 2.6% sequential increase.

At Noida-based HCL Technologies Ltd, India’s third-largest IT services company, the plot reversed. The company outperformed analyst expectations on both counts—revenue and net profit. HCLTech reported a 2.6% sequential rise in revenue to $3.53 billion, while net profit rose 7.5% to $544 million. Even then, this was HCLTech’s weakest third-quarter growth in five years.

Also read: HCL serves up a heady cocktail, but valuation leaves no room for error

However, the stock performance of both these companies betrayed their financials.

On Friday, TCS shares gained 5.7% to ₹4,265.55 a share. On the other hand, HCLTech shares fell 9% on Tuesday to close at ₹1,813.95 per share.

In this backdrop, Mint puts the spotlight on five things to watch as Infosys announces its third-quarter earnings results.

1. Revenue and growth forecast

Infosys is estimated to post a sequential dollar revenue decline of 1.7%, according to a Bloomberg survey of 25 analysts. 

This would imply that Infosys is on the same boat as larger peer TCS in terms of revenue decline. For investors who expect Infosys to end the year on a strong footing, on the back of strong deal wins in the first half of the fiscal, a revenue decline would come as a jolt.

In April last year, Infosys set an initial full-year growth target of 1-3% in constant currency terms for the financial year ending March 2025. By July, it raised its projection to at least 3%, driven by a record number of large deal wins and a more favourable macroeconomic outlook. 

Later, the company further revised its growth forecast to a top end of 4.5% in constant currency terms. However, the projection of a revenue decline now casts doubt on its full-year growth and the management’s commentary will be eagerly awaited.

“We think Infosys should be part of investor portfolios positioned for a global macroeconomic recovery as we see it as a key beneficiary of discretionary demand pick-up and GenAI adoption,”said Kumar Rakesh, associate director for equity research at BNP Paribas, in a note dated 3 January.

2. Key geographies and verticals

North America is the biggest cash cow for India’s largest software services companies. While TCS’s business declined from the region, HCLTech’s growth was fuelled by clients in the Americas. 

For Infosys, about 57% of its business comes from clients in North America and investors are expected to keep a keen eye on the region, especially the US, which will see Donald Trump take charge later this month. While the company’s reliance on H-1B, or immigrant work visas are not as high as in the past, the management will be cautious of President-elect Trump’s policies once he takes charge.

Banks and financial institutions are the largest revenue contributors for IT service providers. While TCS experienced a sequential decline in banking revenue, HCLTech saw a slight increase in its financial institutions revenue. Investors will closely monitor how Infosys performs in this crucial vertical, which accounts for nearly a third of its total revenue.

3. Why Infosys TCV will be important?

Mint does not generally look at total contract value (TCV) as a metric to compare the financial performance of companies simply because of two main reasons. 

Firstly, each company defines TCV differently. Secondly, the incremental revenue a company reports is not the same as TCV, which can be much more than the actual revenue growth.

Still for TCS, one of the reasons for its strong share performance was its TCV of $10.2 billion, up 19% sequentially. TCV for the Mumbai-based company includes all deal wins and the company clocked this growth despite the absence of a single mega deal. Investors will be closely watching Infosys’ TCV for the quarter to assess its performance in comparison.

4. Hiring engine

Hiring is often seen as a growth indicator for IT services companies, as an uptick in recruitment typically signals higher demand for IT services.

Infosys increased headcount by 598 in the first-half of the fiscal, having added people in the September quarter. 

Also read: Domestic office market surges as India becomes hub for global occupiers

As of the three months through December, both of Infosys’ peers gave mixed results, indicating that uncertainty around demand still looms. While HCLTech added 2,134 employees, TCS reduced its headcount by 5,370. The company’s headcount performance will be a key focus for analysts in the upcoming results.

5. Will Infosys keep up with the promise of giving wage hikes now?

Another speed bump in its growth has been the pushback of wage hikes to January this year, which is much later than the usual June-August period.

For its three lakh strong workforce which make up the biggest slice of its cost pie, delaying salary hikes are a means for software services companies to shore up operating margins amid muted demand for IT services.

The last time the company awarded wage hikes was in November 2023. Wage hikes are essential for two reasons, firstly for retaining employees and boosting morale and secondly, for the implication it has on the broader demand environment. 

Also read: Indian IT services companies shed reliance on H-1B visas

Hikes become a function of demand, which goes to say that if demand for IT services-related work is good, hikes will follow. The year Infosys missed giving wage hikes is also when it reported its slowest growth since Salil took over as chief executive.