Infosys: Margins rise despite higher variable pay

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Infosys’ performance has been better than that of TCS and Wipro. While TCS and Wipro saw sequential fall of 7 per cent in dollar revenues, Infosys’ dollar revenues fell by only 2.4 per cent quarter-on-quarter to $3.12 billion.In rupee terms, the consolidated revenues were up 1.7 per cent sequentially to ₹23,665 crore in the quarter ended June 30, 2020, aided by a depreciating rupee. Consolidated net profit was down 1.5 per cent to ₹4,272 crore due to higher variable compensation to its employees during the quarter.Despite a spike in employee costs, Infosys has managed to control costs during the quarter. This has translated into earnings before interest and tax (EBIT) margin of 22.7 per cent during the quarter ended June 30, 2020. EBIT margins expanded by 160 bps QoQ due to cost control measures which saw a fall in other expenses (down 18 per cent QoQ), consultancy and other professional fees (down 23 per cent QoQ), cost of technical sub-contractors (down 10.4 per cent QoQ), among others.Restarts guidanceOn how its business will progress under the cloud of the pandemic, Infosys has restarted revenue growth and EBIT margin guidance. It has given an EBIT margin guidance for 2020-21 at 21-23 per cent (same range as 2019-20) and a muted 0-2 per cent revenue growth in constant currency terms.Most Indian IT services companies had suspended revenue and margin guidance for 2020-21. Infosys was able to limit the impact on its revenues during the quarter due to a decent performance of its Hi Tech and Life Sciences business segments. Like Wipro and TCS, Infosys saw cuts in revenues from business segments like financial services, retail, manufacturing, among others.The worst hit was retail which saw revenues in dollar terms fall nearly 10 per cent sequentially. This is a phenomenon plaguing most IT services companies as many retail companies are filing for bankruptcy in the US and other regions due to the impact of lockdowns. Infosys’ revenues from its manufacturing business segment fall 8.2 per cent sequentially, due to the lockdown’s impact on the manufacturing sector. Revenues from financial services business segment, which makes up nearly 32 per cent of revenues, fell 1.8 per cent QoQ in dollar terms.

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