Gaining market share in automation and cost optimisation deals: Infy CEO

• Change in revenue guidance is a communication of what we see in the environment, said Infosys CEO.
• Clients looking to reduce or stop digital transformation projects and discretionary spends, he added.
• There is also tremendous interest in cost efficiency and automation projects where Infy has an advantage.
  

After beating street expectations in the second quarter, IT Infosys sounded cautious and guided for slower revenue growth in FY24 – landing both positive and negative surprises for the quarter. This is in spite of a good number of large deals it won during the quarter.

“The change in revenue guidance is a communication of what we see in the environment. On digital transformation projects and discretionary spends, we see continuous attention of clients to reduce or stop them. That’s where we see impact on revenues,” said Salil Parekh, CEO of Infosys in its Q2 press conference on Thursday.

Infosys beat street expectations with a 2.3% revenue growth in constant currency terms in Q2. At the same time, it cut its constant currency revenue guidance for FY24 to 1-2.5% from 1-3.5% it guided earlier.

The Bengaluru-based tech major said that discretionary and large transformation programmes are being reduced significantly. “We see that decision making continues to be slow and volumes are constrained,” Parekh said.

Light at the end of the tunnel

It’s not all gloom and there is a silver lining. Its total contract value (TCV) of large deals is now at $7.7 billion – of which new deals constitute 48%. But few revenues from these large deals will accrue in the current financial year, especially in an environment where rampups are being pushed by clients.

Moreover, the focus of clients has shifted from discretionary and digital transformation to cost optimisation and automation projects. Since that’s where Infosys has an edge over the others.

“There is tremendous interest in cost efficiency and automation projects and we have a great advantage here. We believe we are gaining market share here. That’s how we are winning mega deals,” said Parekh.

A few clients are even expecting savings from the cost efficiency deals to fund their digital transformation projects, he added.

‘Margin levers ahead’

Even as it changed its revenue guidance, Infosys maintained its operating margin guidance for the fiscal year at 20%-22%. The company has recently unveiled its margin improvement plan to bring in operational efficiencies into the company.

In the second quarter, its operating margin expanded by 40 basis sequentially to 21.2%. Nilanjan Roy, the CFO of Infosys said that they are already seeing initial benefits of the programme.

“We know we are carrying inefficiencies in our pyramid structure and utilisation. Our utilisation has improved only by 70 basis points and we have more room for improvement. That will be a key margin lever ahead,” Roy said.

The company’s total utilisation for the quarter stood at 80.4% and earlier, it’s utilisation levels were anywhere between 84-85%.