IT major Infosys is slated to announce its Q2 FY25 earnings on October 17, with analysts forecasting a rise in its consolidated revenue due to a ramp-up in large deals and growing traction in generative AI initiatives. While cost optimizations are expected to aid margins, discretionary spending trends, especially in key verticals like BFSI, will be important watchpoints.
According to a Moneycontrol poll, Infosys is expected to report a 3.9 percent increase in revenue on a sequential basis to Rs 40,857 crore, while net profit is projected to rise by 6.3 percent QoQ to Rs 6,769 crore.
Earnings estimates of analysts polled by Moneycontrol are in a narrow range, so any positive or negative surprises may elicit a sharp reaction in the stock. On October 14, shares of HCLTech closed 1.4 percent higher at Rs 1,865 apiece.
What factors are driving the earnings?
A ramp-up of mega deals, volume growth, the in-tech acquisition, seasonal strength, and a continued recovery in the BFSI vertical are expected to drive the topline growth.
1) Ramp-up of deals: The execution of large deal wins from previous quarters is expected to fuel revenue growth. Axis Securities said, "We expect revenue to report improvement of 4.9 percent QoQ on the backdrop of delayed decision making, deeper furloughs."
2) Generative AI: IDBI Capital expects revenue growth of 3.5 percent in USD terms, partly driven by AI deal wins and the ramp-up of digital initiatives. On a similar note, BNP Paribas pointed out that GenAI and discretionary demand are key catalysts for growth. The brokerage said, "We prefer to play the demand recovery cycle with Infosys, where expectations are modest, valuations are reasonable, and GenAI and discretionary demand could be catalysts."
3) In-Tech Acquisition: In April, Infosys said that it will acquire in-tech, an engineering R&D services provider with a focus on the German automotive industry, in an all-cash deal for 450 million euros. The acquisition was expected to be wrapped in H1FY25, subject to customary closing conditions. Kotak Institutional Equities forecasts 90 bps contribution to revenue from the acquisition, while Nuvama Institutional Equities projected it will contribute a percent to the revenue.
4) Project Maximus and Margins: BNP Paribas also points out that Infosys' two-year margin expansion initiative under Project Maximus is showing tangible results. "Margins are expected to improve by 30 bps helped by strong growth and operational efficiencies (Project Maximus)," said Phillip Capital.
However, Jefferies was of the view that large deal ramp-up and hiring in Q2FY25 might cause Infosys to face some margin headwinds. "However, sub-con optimization and positive impact of value-based selling should be able to negate the headwinds."
What to look out for in the quarterly show?
Analysts will closely watch commentary on discretionary spending trends, particularly in the BFSI and retail verticals. Additionally, the outlook on large deal TCV and hiring trends will also be in focus. "Key things to watch out for include commentary on cost takeout projects, the banking vertical, and outlook on client discretionary spend," Nomura said. Investors will also be keen on Infosys' plans for scaling generative AI partnerships.
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