Infosys Q2 preview: Analysts expect revenue growth of 5.3% QoQ, 19.8% YoY

Infosys Ltd., India’s second-largest IT services provider, may report revenue growth of 5.3 percent sequentially on a constant currency basis and 19.8 percent YoY in the quarter ended September 30.

Revenue growth in dollar terms is expected at about 4.8 percent on the back of a ramp-up in the Daimler AG deal, strong seasonality and broad-based growth across verticals.

Infosys shares fell 0.4 percent to Rs 1,684.80 at the close on the BSE on October 12. The stock has generated 23.7 percent returns during this financial year and about 7 percent returns since July. The company is scheduled to report its 2Q earnings on October 13.

Top line expectations

“We expect revenue growth of 5.4 percent QoQ on CC (constant currency) basis and cross-currency headwinds of 70 bps on dollar revenue growth. In USD terms, revenue is expected to grow by 4.7 percent QoQ,” said Sharekhan. “Growth would be led by revenue contribution from the Daimler deal, higher adoption of digital transformation by clients, anticipated broad-based growth across verticals, and strong seasonality.”

Banking, financial services and insurance (BFSI) and retail are expected to contribute about 50 percent of the total revenue. Geographically, the US will continue to account for more than 60 percent of revenue.

Prabhudas Liladhar expects constant currency growth of 5.6 percent on a QoQ basis. It expects Infosys to upgrade its FY22 revenue growth guidance to 17-18 percent YoY from 14-16 percent earlier.

Deal wins

Motilal Oswal expects the momentum in large deal wins to continue, while Prabhudas Liladhar suggested a deal with total contract value (TCV) of about $2.5 billion.

“Deal signings are expected to remain healthy, although deal TCVs in Q2 could be muted given higher contribution from smaller deal sizes (includes deals with TCV of $50 million+),” Sharekhan said.

Among Indian IT companies, Infosys currently has the highest number of $100 million-plus category clients, which, according to Anand Rathi Securities, contribute about 3 percent of its total revenue. The share of clients in the $1 million+ basket is 69 percent, while those in the $10 million+ and $50 million+ baskets contribute 22.7 percent and 5.1 percent, respectively.

Operating performance

The company’s margins are expected to decline by more than 100 bps, according to most experts.

“EBIT margin to contract by 127 bps QoQ. A decline in margins on a sequential basis would be owing to the impact of transition costs of the Daimler deal, higher subcontractor expenses, lower utilisation rate, and wage revision for junior and mid-level employees, partially offset by higher revenue growth and cost-efficiency measures. However, net profit is expected to increase by 0.3 percent QoQ,” Sharekhan said.

Prabhudas Liladhar echoes the views and expects margins to decline by 116 bps QoQ.

No change is expected from Infosys on the margin guidance, which is 22-24 percent.

Things to monitor

Experts will look for the management’s take on opportunities from shifting of client budgets towards digital and cloud; the demand environment, especially the BFSI, hi-tech, and retail verticals; mix of sizes in deal TCVs and deal pipeline; margin outlook, given another round of wage revisions and rising attrition rate; pricing environment; duration of supply-side pressures, and the impact on margins and measures taken to manage these challenges.