Infosys to release Q1 results report on July 14; keep an eye on these 10 factors

Dollar Revenue

Dollar revenue is expected to increase 2.6 percent to USD 2,636.2 million QoQ and constant currency revenue growth may be at 2 percent.

"Contraction in legacy app service business from cloud based SaaS adoption, and no meaningful signs of pick-up in both financial & retail verticals (two combined are 50 percent of Infosys' revenues) will impact revenue growth," Goldman Sachs said while retaining sell call on the stock.

Operational Performance

EBIT (Earnings before interest and tax) during the quarter is seen declining 4.4 percent to Rs 4,025 crore and margin may contract by 95 basis points to 23.65 percent compared with previous quarter.

Factors that impact earnings

Analysts feel its India business growth could be strong from GST contract but consulting is likely to remain muted in Q1.

Infosys has also indicated during the quarter that resurgence of BFSI spending is still not visible.

Rupee strength, visa costs and local hiring at onsite costs may impact its margin performance.

Wage hikes deferred from Q1 to Q2 also indicated sluggish revenue momentum (and unlikely to be retrospective), analysts say.

Company's Q4FY17 was a muted quarter which the company attributed the weakness to ‘unanticipated execution challenges and distractions in a seasonally soft quarter’.

Any Revision in FY18 Guidance?

Analysts feel the IT bellwether is likely to maintain its constant currency revenue guidance at 6.5-8.5 percent (against 8.3 percent in FY17 and 13.3 percent in FY16) and operating margin guidance at 23-25 percent for the current financial year (revised down from 24-26 percent earlier).

In the beginning of financial year, Infosys has guided for FY18 dollar revenue at 6.1-8.1 percent (against 7.4 percent in FY17), implying revenue CQGR (compounded quarterly growth rate) of about 2.1-2.9 percent over the four quarters.

Based on Q1FY18 estimated performance, achieving upper end of the guidance band seems difficult; a more realistic expectation would be closer to 7.5 percent, analysts feel.

The company expects its rupee revenue for FY18 at 2.5-4.5 percent (against 9.7 percent in FY7).

Capital allocation?

Investors would be keenly looking for details on the share buyback plan announced during the Q4FY17 results including exact quantum, buyback dates and any ceiling price.

Infosys increased its payout to 70 percent of free cash flow from 50 percent of post tax profits starting FY18 (via dividend or buyback), implying a marginal increase in payout.

For FY18, company will pay an additional Rs 13,000 crore via dividend or buyback as it has cash of Rs 38,773 crore as of March 2017.

Any disappointment on either guidance or buyback plans, Goldman believes, could lead to a downward reaction in the stock price.

Deal Pipeline

Analysts feel the large deal pipeline continued to be healthy but deal pipeline skewed towards renewals (legacy IT) rather than new wins.

Infosys COO Pravin Rao statements at Morgan Stanley conference

He said the company is not seeing any pricing pressure as such but seeing tremendous cost takeout in run side of business.

"We are seeing cost take outs of 30-40 percent over life of the project of 3-4 years in the run side of the business (which is 70 percent of total), he said, adding clients are looking at taking cost out and reinvesting into new side of business.

However, cost take outs are not incremental and it has been happening for the last couple of years.

Segmental Performance

Analysts continued to be optimistic about financial services as there is expectation of BFSI spend late in year.

Analysts further said they have not seen any tangible sign so far of banking spend having picked up yet but we might see positive impact towards the end of year.

Retail segment will continue to be volatile as retail store closures, especially Brick & Mortar in the last few months, have been higher than the past.

Overall consulting business of the company is likely to be muted this year. Repurposing of consulting will take whole of this year, analysts feel.

North America consulting business is doing well and focus is on newer areas like digital analytical (but this is a small portion of the business), they said.

The company has seen challenges in Europe consulting business (Lodestone) in the last 12-18 months, which is not out of the woods yet.

Key things to watch out for

> Comments on pick-up in US BFSI spending
> Senior management attrition and tussle with ex-founders. Sandeep Dadlani, Infosys head of Americas, Retail, CPG and Manufacturing quits
> Postponing wage hikes to Q2 (versus Q1 normally)
> Deal win momentum as management is targeting to achieve USD 1 billion quarterly total contract value (TCV)
> Slower reallocation to digital deals is a concern
> Update on the USD 2 billion dividend/buyback plan (the company has been waiting for regulatory clarity to finalise the details)
> Reports suggested that Infosys founders may be exploring selling entire stake. Founders hold 12.75 percent in the company, which is valued at Rs 28,000 crore. Sale is likely through block deals and in tranches.
> Infosys is is increasing onsite presence to counter rising protectionism. It will hire 10,000 people in 2 years and open 4 centres in the US.

In the year 2017 so far, Infosys has underperformed TCS by 9 percent and currently trades at close to 15 percent discount to TCS.