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Infosys Q3 Preview | Daimler deal, growth across verticals could boost top line; full year-guidance key

Infosys | The stock has given an 11 percent return since October 2021, which is largely similar to gains in the Nifty IT index during the same period but beat the benchmark Nifty50 that gained just 2.5 percent

January 12, 2022 / 08:54 AM IST
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Infosys, the country’s second-largest IT services provider, is expected to report healthy growth in Q3FY22 top line driven by the hybrid cloud partnership with German auto major Daimler announced in December 2020, the ramp-up of large deals and growth across verticals, while the full-year guidance could be revised upwards on January 12, with a likely increase in the attrition rate.

Along with Infosys, Tata Consultancy Services and Wipro will also release their quarterly earnings on January 12.

The Infosys stock has given an 11 percent return since October 2021, which is similar to gains in the Nifty IT index during the same period, but beat the benchmark Nifty50 which gained just 2.5 percent.

The upward revision in outlook by Accenture in December 2021 and expected growth in the IT sector amid increasing focus on digitalisation lifted sentiment.

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Experts largely expect around 3.7 percent sequential growth in revenue in constant currency terms, and around 3 percent quarter-on-quarter (q-o-q) growth in dollar terms for Q3FY22, though there could be some impact of seasonality.

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Sharekhan expects revenue growth of 3.7 percent q-o-q on a constant currency basis and cross-currency headwinds of 60 basis points (bps) in dollar revenue growth.

“In USD terms, revenue is expected to grow by 3.1 percent QoQ. Growth would be led by one-month revenue contribution from the Daimler deal, higher adoption of digital transformation by clients, and broad-based growth across verticals. Growth would be partially negated by weak seasonality,” analysts at Sharekhan wrote.

Kotak Institutional Equities also forecasts sequential revenue growth rate of 3.7 percent in constant currency terms driven by contribution from the Daimler mega-deal, and continued strength in discretionary spending by clients.

“These will offset the impact of furloughs to some extent,” the brokerage said.

Full-year guidance

Analysts expect Infosys to revise upwards its full-year revenue growth guidance with healthy deal signings and an unchanged margin forecast but there could be muted large-deal announcements in Q3FY22.

Sharekhan believes Infosys would increase its FY22 revenue growth guidance to 17.5-18 percent from 16.5-17.5 percent earlier, while it would maintain its margin guidance at 22-24 percent.

“Overall deal signings are expected to remain healthy, although deal total contract value (TCVs) in Q3 could be muted given higher contribution from smaller deal sizes (less than deal TCV of $50million+). We expect overall deal TCVs to remain stable (at around $2.5 billion) on a sequential basis,” said Sharekhan.

Growth is powered by discretionary programs that have a smaller size but also shorter execution time frame that do not get captured in Infosys’ large-deal definition of TCV of at least $50 million, said Kotak, which expects muted large-deal TCV of $2-2.5 billion.

The brokerage feels Infosys will increase the lower end of the revenue growth guidance band to 17-17.5 percent in constant currency terms for FY22 from 16.5-17.5 percent earlier.

Margin performance

The overall EBIT (earnings before interest and tax) margin is expected to be flat to negative for the quarter on a sequential basis amid wage revisions, higher subcontracting cost and fall in utilisation rate, with single-digit growth in the bottom line.

“We expect 70 bps QoQ decline in EBIT margin due to impact of transition costs of the Daimler deal, further wage revisions across different bands, decline in employee utilization rate, and higher subcontracting costs,” Kotak said. The year-on-year decline in EBIT margin stood at 2.5 percent due to a range of factors including a catch-up on wage revisions, upfront transition costs in large deals and the impact of higher attrition, it said.

According to Elara Capital, EBIT margin could be flat on wage increase (senior) and select compensation intervention.

Key things to watch out for

Apart from full-year guidance, commentary on margin outlook given the rising attrition rate and financial interventions to manage supply-side concerns; challenges of execution in complex transformational programs; mega-deal activity and pipeline of deals; indications on IT spending for CY2022; commentary on the magnitude of opportunities from shifting of clients’ budgets towards digital and cloud and duration of growth; commentary on the demand environment, especially BFSI, hi-tech, and retail verticals; and pricing outlook are key things to watch out for.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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first published: Jan 12, 2022 08:54 am
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