Infosys Q2 preview: What Dalal Street wishes to hear from Nandan Nilekani

Infosys will likely cut CC revenue growth guidance for FY18 to 6-7% from 6.5-8.5% announced earlier, said Kotak Institutional Equities

Infosys, the country's second-largest software services firm, is scheduled to report its September quarter numbers on Tuesday post market hours. 

The quarter holds significance as this will be the first result announcement after co-founder Nandan Nilekani took charge as the company's new non-executive chairman after the sudden resignation of then CEO Vishal Sikka and the exit of four board members, including then chairman R Seshasayee. 

Analysts, at large, believe that more than the Q2 numbers, the management commentary will remain in focus as an update on the company's strategic preferences is crucial at this juncture. 

"Management commentary will take centrestage as more than guidance, revenues or net profit, Nilekani's future blueprint for the company and progress on the CEO recruitment front holds significance," said Sarabjit Kour Nangra, vice-president research (information technology), Angel Broking. 

Equinomics Research & Advisory founder G Chokkalingam believes Nilekani should put in efforts to reduce attrition at senior levels and should also be committed to rewarding shareholders through dividends or buybacks. 

"Growth is an industry problem and a major exogenous issue. Nothing much can be done on that front. What Nilekani can do to help the company and shareholders lies in two areas. He can announce his efforts to reduce staff attrition, especially at very senior levels, and also his commitment to rewarding shareholders periodically in terms of regular buybacks and/or special dividends. These commitments could help Infosys win back market valuation in line with peers like TCS," he said. 

Below is what brokerages expect out of Infosys' September quarter numbers:

1) Revenues

In dollar terms, Infosys is likely to report 3.6 per cent sequential and 6.2 per cent year-on-year (yoy) revenue growth at $2,748 million, say analysts at HDFC Securities. In rupee terms, revenues are likely to come in at Rs 17,585 crore. The IT major is seen reporting a 2.6 per cent quarter-on-quarter (QoQ) sequential growth in revenue in constant currency (CC) terms. The numbers may be supported by 95 basis points (bps) cross-currency tailwind, they said.

Analysts at Kotak Institutional Equities expect CC revenue growth of 2.3 per cent and CC tailwind of 80 bps. We expect lower cross currency tailwinds based on the assumption of lower forex gains from revenue hedges, they said in a note.

2) Net profit

The company’s profit after tax (PAT) is expected to come in at around Rs 36,00 crore, up 1.8 per cent yoy, but down 1.5 per cent on a sequential basis, estimated analysts at Motilal Oswal Securities. JM financial sees a 2.75 per cent sequential jump in Q2 PAT at Rs 35,78 crore.

3) Margins

Analysts at Edelweiss Securities see the earnings before interest, tax, depreciation and amortisation (Ebitda) margin contracting by 90 bps qoq on account of wage hikes during the quarter, partially set‐off by operational efficiencies and absence of visa costs.

Reliance Securities sees Ebit margin to come in at 23.3 per cent, down 74 bps qoq and 156 bps yoy.

4) Guidance

Infosys will likely cut CC revenue growth guidance for FY18 to 6-7 per cent from 6.5-8.5 per cent announced earlier, said Kotak Institutional Equities. However, HDFC Securities believes Infosys will maintain its Ebit margin guidance of 23-25 per cent. The brokerage pegged 23.2 per cent Ebit margin for FY18.

Meanwhile, analysts at Motilal Oswal Securities said: Infosys' already uninspiring CC growth guidance may be tested if it sets off on a slow footing, possibly impacted by management churn, and yet no respite offered by the banking, financial services and insurance segment (recovery of which is embedded in the guidance). A repeat of the pruning of expectations may now switch the disconcerting impact from valuations to earnings, they added.  

5) Other key monitorables

Commentary on recruitment at top management, hiring in the US, client budgets, and deal wins will remain key monitorables, said Edelweiss.

Kotak Institutional Equities expects the company to share details on the CEO recruitment front and discuss changes in digital and growth strategy (if any). The demand environment across verticals, especially in financial services, the pricing outlook, and progress on automation will also be in focus, they said.