Infosys Q1 Preview | Profit to grow 5.5-9.5%; revenues to jump 21.5-22.5%

The PAT for the company during the previous quarter stood at Rs 5,686 crore on a consolidated revenue of Rs 32,276 crore.

Brokerage expectations

Constant Currency

The brokerages expect a 4.0–4.6 percent growth in revenues in terms of constant currency (CC) and 3.6–3.9 percent growth in terms of dollar revenues on a sequential basis.

“We forecast sequential strong revenue growth rate of 4.5 percent in CC driven by continued strength in discretionary spending by clients”, said a report from Kotak Institutional Equities.

Margins

The supply side pressures continue to plague the Indian IT sector and Infosys is no exception. The impact of wage hikes, increased travel expenses and drop in utilisation due to aggressive fresher hiring in last two quarters. are likely to pull the margins further down during the quarter.

“Margins are expected to decline by 150 bps QoQ due to salary hikes, supply side pressures, travel costs partly offset by the depreciation in the Indian Rupee”, a report from the brokerage firm Phillip Capital said.

The brokerage expects the EBIT (earnings before interest and tax) margins of 20.1 percent compared to the margins of 23.7 percent during the year ago period and 21.6 percent during the March ending quarter.

Kotak Institutional Equities on the other hand, “forecast 80 bps sequential and 290 bps YoY decline in EBIT margin, largely due to wage revisions and increase in travel costs, offset by increase in margins of manufacturing vertical and modest Rupee depreciation of 1.4 percent (net of cross-currency headwinds)”.

According to a report from Kotak Institutional Equities, large deal execution has been under the scanner noting sharp margin deterioration. “Margins in the manufacturing vertical has declined by over 1,675 bps YoY and accounted for 170 bps of the 290 bps YoY decline in EBIT margin”. It expects margins in the manufacturing vertical to increase in the June 2022 quarter.

Guidance

The brokerages expect Infosys to retain a guidance of 13-15 percent revenue growth in CC (constant currency) terms and EBIT margins of 21-23 percent.

The growth guidance is expected to stay front-ended, i.e. the brokerages expect strong growth commentary for September 2022 quarter.

Focus Areas

High attrition is a worrying sign for Infosys and the concern has now shifted to onsite, where attrition among local headcount is higher than offshore attrition. Quantum of wage increase onsite will be an area of focus.

Investors will also focus on execution of large deals, especially from manufacturing vertical and assumptions underlying FY23 revenue guidance, especially in light of deteriorating macro environment.

The impact of supply-side pressures on margins and the levers to defend margins in light of creep up in travel expenses and supply-side pressures will be monitored closely. Investors will also be looking at the mega deal activity, deal pipeline and scope of price increases to offset margin pressure.

On July 22, shares of Infosys closed at Rs 1506.30 apiece on the BSE, down 1.73 percent, while the benchmark Sensex ended 390.28 points or 0.70 percent at 56,072.23. The stock has declined 5.3 percent over the past one year but is trading higher by 4.8 percent over the past one month.

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