Will Infosys Surprise Street on Q3?
Three brokerages have said the company could cut its revenue growth guidance again in dollar terms
“We expect Infosys to
report the weakest results and drop its US dollar guidance (growth
forecast) to seven-right per cent. We would look for signs of cyclical
strength, particularly in US banking or retail, to filter into
commentary for 4Q (fourth or March quarter),” brokerage CLSA said.
At least three brokerages, two domestic and one global, have said the
company could cut its revenue growth guidance again in dollar terms,
even if it maintains the revised one in constant currency terms.
Amid pressure over large deal wins in traditional IT services business,
coupled with slower growth in the digital technology one, the company
has twice reduces its growth guidance for this financial year, finally
to eight to nine per cent.
In a new-year letter to employees, chief executive Vishal Sikka said
things like Donald Trump’s US victory and demonetisation here were mere
blips. The big impact would be technology disruption. A slow growth
projection for a second time has put more pressure on Sikka for
achieving his annual revenue target of $20 billion by 2020, with 30 per
cent margins and per-employee productivity of $80,000. Also, he has
issues such as the H1B visa norms, increasing the minimum wage in the US
and local hiring to deal with.
In Q2 (July-September), net profit grew 6.1 per cent to Rs 3,606 crore
and revenue at 10.1 per cent to Rs 17,310 crore over the year-before
period. Operating margins, calculated as revenue minus costs, improved
by 80 basis points to 24.9 per cent as the company focused on efficiency
by increasing work offshore and reducing onsite.
Here are five things investors should watch for:
Deal wins during Q3: The company has been seeing pricing pressure and
delay in deal wins. The RBS contract rampdown has impacted two quarters,
back to back. “Investors should look for deal wins in the third quarter
and total contract value,” says Ashish Chopra of brokerage Motilal
Oswal. The contribution of large deals in its revenue is crucial for
$20-bn revenue by 2020.
Measures for macro economic challenges: After Donald Trump’s
presidential election rhetoric to bring back jobs to the US, a Bill has
been proposed by legislators there for a minimum pay hike for H1B visa
holders from $60,000 to $100,000 yearly. Since the company gets a
significant share of its IT services revenue from there and deploys
Indians onsite, the management’s comments on how to address such
challenges is important, said Kawaljeet Saluja, research analyst of
Kotak Institutional Equity.
Maintaining margin: At least three brokerages have said Infosys might
see a decline in margin from its earlier outlook of 24-25 per cent, on
the back of seasonal impact and RBS ramp-down. One should take a note of
its margin projections for the whole financial year.
Realisation on investments in new areas: The company has invested in
the past three quarters on automation and digital technology, such as
acquiring Danish artificial intelligence firm UNSILO to am unmanned air
vehicle firm, ideaForge. It is important to hear the company’s
commentary on profitability from these investments over the next few
quarters.
Vertical-wise improvement: Infosys has
already said it has pricing pressure from BFSI (banking, financial
services, insurance) clients and some other verticals. And, on a
“softness” in the US. “Management commentary on the operative
environment, especially in BFSI after comments around potential softness
in US, is important to watch,” said Pankaj Kapoor, research analyst, JM
Financial. Investors should also look at sequential change in constant
currency realisation.
Reference - http://www.business-standard.com/article/economy-policy/will-infosys-surprise-street-on-q3-117011200064_1.html
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