Expect Infosys margin to improve substantially from Q4: Sandip Agarwal

"If this attrition falls by another 6-7% for the large players and 8-10% for the smaller and midsize players, then we are looking at about 200 to 400 bps margin expansion which should lead to 10% to 30-35% kind of EPS upgrade versus what is the estimate right now. So the whole thing hinges on attrition falling, execution continuing and deal pipelines remaining buoyant," says independent market expert Sandip Agarwal.

For Infosys, we see a solid beat coming in as far as the top line is concerned. There’s a guidance upgrade. Is there anything to complain about at all in the numbers and do you expect significant upgrades for the stock tomorrow?
The numbers are looking better than what we had anticipated. So the numbers definitely are good. The downward tilt in attrition and the commentary of the management on that will decide the future margins. The revenue growth upgrade is a very positive move versus expectation of no upgrade. As of now, it’s a beat on all fronts.


The deal wins rose to $3.3 billion and this is much higher than the $2.7 billion that they did last quarter. Before that, it was $1.7 billion only. Does this give you a lot more confidence about the recessionary fears the Street is worried about? Do you think that fears about slowing in the deal pipeline is a bit exaggerated?
I would put it in a different way; I would say simply that we have to remember that outsourcing is at the lowest end of the value chain. So it is the cheapest way of executing complex technology projects. This is what has been highlighted by TCS CEO also over the last two, three quarters and all other CEOs that if there is a recession or there is a hard landing, there could be one or two quarters where the pipelines will go down a bit and there would be some kind of pressure but on an overall basis, we will see a much bigger transformation in deals movement because it will lead to massive cost rationalisation.

So that is the way I will put it. I am not worried that maybe in the near term one or two quarters, we may see some kind of a fall in the deals. In the long term, it will be better.

How would you want to play it? If you had to take a bet, which stock would you bet on?
It is always the sector call which plays out. The sector will start giving substantially good returns after a quarter’s time, maybe once the budget details start coming off on the client side. Right now, both the companies are looking very attractive, particularly as attrition has fallen. If this attrition falls by another 6-7% for the large players and 8-10% for the smaller and midsize players, then we are looking at about 200 to 400 bps margin expansion which should lead to 10% to 30-35% kind of EPS upgrade versus what is the estimate right now.

So the whole thing hinges on attrition falling, execution continuing and deal pipelines remaining buoyant. If that is the scenario, CY2023 will be the year where we will again make a good amount of money. The question is which one will be a preferred pick? I would say both the companies are looking good but I will wait to see which one can control the attrition problem faster and that will probably have an edge in terms of return.

What could be the reason that Infosys has not been able to deliver on margin this time around? Their revenue performance is much better than expectation, attrition has come down. Should we be worried or looking out for something specific here?
You are right that attrition has come down but we have to remember that attrition coming down also impacts with lag effect because while the numbers might have come down, there is a transitionary phase where we will still get cost pressures and cost impact. It does not reflect in the numbers immediately.

Number two, we have to see the finer details of where growth is coming from. There are some geographies, some businesses which have comparatively lower margins than the others. When we see the fine print of those segments, we will get some idea on it. But broadly, we should expect margin to improve from next quarter in a substantial way because attrition has fallen quite substantially for Infosys in this quarter. We have not seen such a sharp fall in other cases but here the fall has been sharper. So, we will see much better margins next quarter in Infosys if other factors remain same.