As Infosys gears up to announce its Q1 FY25 results on July 18, market analysts are anticipating notable revenue growth fueled by the ramp-up of large deals and operational efficiency. However, despite these positive indicators, a sharp decline in net profit is expected due to the absence of a significant tax refund that boosted the previous quarter's earnings.
Earnings estimates from analysts polled by Moneycontrol indicate that Infosys' revenue is likely to rise by 2.4 percent quarter-on-quarter (QoQ) to Rs 38,850 crore, while net profit is expected to decline by 21.6 percent QoQ to Rs 6,248 crore. InCred Equities noted that the absence of income-tax refunds and lower other income would likely lead to a sequential decline in the company's consolidated net profit.
This divergence in earnings estimates suggests that any surprises in the results could lead to significant stock reactions.
This follows a challenging January-March quarter, during which Infosys's revenue fell 2.3 percent from the preceding quarter, and the EBIT margin contracted to 20.1 percent. Net profit during that quarter surged 30.5 percent quarter-on-quarter, boosted by an income tax refund of Rs 6,329 crore.
What factors are driving the earnings?
1. Large Deal Ramp-ups: The ramp-up of significant deals won in prior quarters is expected to drive revenue growth. Equirus Capital and Kotak Institutional Equities have both highlight the absence of adverse impacts from the previous quarter as a positive factor.
2. Cost Optimizations: Improved cost structures, including lower onsite expenses and better utilization rates, are anticipated to bolster operating margins. This is echoed by multiple brokerages, including Axis Securities and ICICI Securities.
3. Absence of One-time Costs: The previous quarter's results were impacted by one-time costs, such as visa expenses and cyber incident-related costs. The absence of these expenses in Q1 FY25 is expected to aid margin expansion, as noted by Emkay Global and BNP Paribas.
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According to Moneycontrol's estimates, Infosys's EBIT margin is expected to rise by 50 basis points quarter-on-quarter to 20.6 percent in Q1 FY25. BNP Paribas anticipates an expansion in the EBIT margin, supported by the reversal of one-off impacts but slightly offset by deal ramp-up costs.
Emkay and Axis Securities also predict an increase in EBIT margins, highlighting better cost optimisations and the absence of one-time costs from previous quarters. ICICI Securities foresees a robust 97 basis points expansion in the EBIT margin, bolstered by higher brand building and lower visa expenses.
What to look out for in the quarterly show?
Market watchers and investors will keenly observe the management's commentary on deal TCV (total contract value) and pipeline, verticals’ performance, discretionary client spending, and the impact of macro headwinds on demand.
Kotak estimates a Total Contract Value (TCV) of $3 billion, and ICICI expects a strong pipeline with key deals doubling from Q4 FY24 levels. Commentary around pricing scenarios and utilisation rates will be critical, said BNP Paribas and Emkay. The BFSI sector, in particular, will be under scrutiny due to its underperformance in previous quarters. BNP Paribas and Axis will look for updates on core markets like the US and Europe.
Most brokerages, including BNP Paribas, Emkay, and Prabhudas Lilladher, expect Infosys to maintain its FY25 revenue growth guidance of 1-3 percent in constant currency terms and an EBIT margin range of 20-22 percent.
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