Infosys Q3 FY25: Five key factors to watch

Infosys

As Infosys gears up to announce its third quarter results ending December 31, 2024 (Q3 FY25), all eyes are on the information technology (IT) giant’s performance in a seasonally weak quarter marked by furloughs.

The Bengaluru-headquartered company will report its numbers on January 16.

Analysts expect the company to raise its FY25 revenue growth guidance while maintaining its margin outlook. Investor focus will be on large deal wins, trends in discretionary spending, and how efficiently the company manages its operations.

Here are the top five themes to watch out for in Infosys’ Q3 earnings:

The Street expects Infosys to revise its FY25 revenue growth guidance upwards, with estimates ranging between 4.25-4.75 percent in constant currency (CC) terms, as per Nuvama Institutional Equities, and 4.5-4.75 percent, according to Kotak Institutional Equities.

This reflects an improvement from the previous guidance of 3.75-4.5 percent, that the company revised in October.

Brokerage Nuvama predicts sequential revenue growth of 0.8 percent in CC terms and flat growth in dollar terms.

Meanwhile, brokerage JM Financial says, in a pre-earnings research note, that a 90 basis points (bps) cross-currency headwind may weigh on performance.

Brokerages say furloughs and the stabilisation of large deal ramp ups, which drove growth in the first half of the fiscal, could pose challenges going ahead.

According to a Moneycontrol poll of nine brokerages, Infosys is expected to post a 0.5 percent sequential uptick in revenue to Rs 41,206 crore, as against the Rs 40,986 crore that it clocked in the preceding quarter.

The poll also pegged the IT behemoth's consolidated net profit to grow 3.5 percent on quarter to Rs 6,734 crore. Infosys had recorded a net profit of Rs 6,506 crore in the previous quarter.

Analysts unanimously agree that Infosys will keep the guidance range of 20-22 percent unchanged.

For Q3, brokerage house Kotak forecasts stable margins at 21.2 percent, while Nuvama predicts a slight improvement of 30 bps sequentially, driven by Project Maximus, pricing gains, and subcontractor cost optimisation.

Nonetheless, not all analysts agree with Kotak Institutional Investor.

Brokerage Motilal Oswal Financial Services expects margins to decline by 30 bps because of furloughs and lower working days. Although, a part of this will be offset by pricing gains, subcontractor cost optimisation, and Project Maximus.

Project Maximus is a margin improvement plan which is aimed at optimising costs.

JM Financial also highlights that slower growth could limit margin expansion, even though lower transition costs for large deals may provide some relief. “Lower transition cost associated with large deals could benefit margin, though lower growth will limit the extent of expansion.”

Investors will keep an eye on margin levers, including cost optimizations and potential updates on wage hike cycles.

The demand environment will be closely watched, particularly for discretionary spending in the banking, financial services and insurance, (BFSI) and retail verticals. Brokerage JM Financial expects some recovery in discretionary spending, while brokerage Kotak believes the outcome of client budgets will offer critical insights into future demand.

Infosys’ rival and India’s India’s largest software exporter Tata Consultancy Services (TCS) painted an optimistic picture for the year ahead, driven by improving discretionary spending, shorter deal closure cycles, and more transformative projects in the pipeline.

Large deal total contract value (TCV) will also be watched out for, as brokerage Kotak expects the Salil Parekh-led company to clock in a $3 billion TCV for Q3.

Additionally, the Street will also focus on the average contract value (ACV) of deal wins, the pipeline for smaller deals, and the discretionary spend outlook across verticals.

Third-party or pass-through revenues for service delivery to clients are likely to play a significant role in Q3FY25.

Pass-through revenue refers to income that is collected on behalf of clients and typically arises when IT firms include third-party costs such as software licences, cloud services, etc., in their billing to clients.

Kotak expects these revenues to contribute positively to sequential growth, though furlough impacts may offset some of the gains. The composition of these revenues and their contribution to overall topline growth will be keenly watched.

Analysts reiterated that Infosys stands to benefit from larger and more comprehensive outsourcing deals with clients increasingly consolidating their vendor lists.

This metric remains critical for Infosys amid margin pressures and furlough impacts.

Updates on attrition and hiring plans will be of particular interest. Brokerage Kotak highlights that Infosys’ ability to control subcontractor costs under Project Maximus will be important for sustaining margins.

Moreover, the wage hike cycle and its potential impact on costs and attrition will be closely monitored.

Infosys had deferred annual wage hikes to the fourth quarter of the current financial year (Q4FY25).

Typically, implemented earlier in the year, the wage hike delay reflects the broader uncertainty in the global demand environment, particularly for discretionary IT services. IT companies face pressure from weak discretionary spending, delayed client budgets and ongoing macroeconomic uncertainties. This metric will be closely watched out after TCS and HCLTech announced there scheme of things recently.