Infosys Q2 preview: IT major could increase revenue guidance for FY22

After a disappointing show by information technology (IT) bellwether Tata Consultancy Services (TCS) for the quarter ended September 2021, markets have switched focus towards the earnings report card by Infosys which is slated to be out on October 13, Wednesday.

Most analysts forecast a nearly 20 per cent year-on-year (YoY) jump in Infosys' revenue during the second quarter of the financial year 2021-22 (Q2FY22) on contribution from Daimler deal, higher adoption of digital transformation by clients, anticipated broad-based growth across verticals, and strong seasonality. They further expect Infosys to increase its revenue guidance for the third time in a row.

Net profit, meanwhile, could range between 7-10 per cent. "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 $50mn+), brokerage Sharekhan said in an earnings preview note.

That said, supply-side challenges could continue to hurt the company's operating margins. They expect EBIT (earnings before interest and tax) to contract led by wage increments implemented during the quarter in addition to the increased attrition and higher retention cost.

During the said quarter, shares of Infosys have added 6 per cent compared with a 13 per cent rise in the NSE Nifty and 20 per cent in the Nifty IT index.

Here's a lowdown at what brokerages are projecting for Infy's Q2 earnings:

HSBC
The global brokerage pegs Infosys Q2 net profit at Rs 5,321 crore, up 9.8 per cent YoY and 2.4 per cent quarter-on-quarter (QoQ). The company's net profit stood at Rs 4,845 crore in the same period a year ago while it was at Rs 5,195 crore in the preceding quarter of FY22.

We forecast constant currency (CC) growth of 6.2 per cent QoQ as the large deal signed with Daimler in December 2020 is expected to ramp up in this quarter, the brokerage said. In USD terms, it eyes revenue growth of 5.5 per cent QoQ to $3,990 million. Meanwhile, it pegs revenue (in rupee terms) at Rs 29,561.3 crore, up 20.3 per cent YoY as against Rs 24,570 crore reported in the corresponding period last year. Sequentially, the figure could rise 6 per cent from Rs 27,896 crore posted at the end of the June 2021 quarter.
 
"We expect FY22 guidance of 12-14 per cent is likely to be upgraded to 15-17 per cent. Commentary around large deal win environment will be key," analysts at HSBC said.

Lastly, the brokerage expects the margin to decrease by 110 bps QoQ, with wage hike impact and Daimler deal ramp up as main drivers. It pegs Q2 EBIT margin at 22.6 per cent compared with 23.7 per cent in Q1FY22 and 25.3 per cent in Q2FY21.

 

Sharekhan
This brokerage expects Infosys to post a 19.5 per cent jump in revenue on a yearly basis at Rs 29,351 crore while on a sequential basis, the revenue could grow by 5.2 per cent. It eyes revenue growth of 5.4 per cent QoQ on CC basis and cross-currency headwinds of 70 bps on dollar revenue growth.

"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 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," the brokerage noted. Amid this backdrop, the quarterly profit is seen at Rs 5,213 crore, up 7.6 per cent YoY and 0.3 per cent QoQ.

We believe Infosys would increase its FY2022E revenue growth guidance to 16-18 per cent from 14-16 per cent earlier, while it would maintain its margin guidance at 22-24 per cent, the brokerage added.

Commentary on mix of deal sizes in deal TCVs and deal pipeline; commentary on margin outlook given another round of wage revision and rising attrition rate; pricing environment; and measures taken to manage sup-side challenges will be some of the monitorables, it said.

Edelweiss Research
Being the market leader, Infosys will be a key beneficiary of core transformation, accelerated cloud and digital adoption and deal ramp-up, said analysts at Edelweiss Research, thus forecasting a USD revenue growth of 6.3 per cent QoQ and 6.7 per cent QoQ in CC terms for Infosys. In line with other brokerages, it also expects Infosys to increase the guidance from 14–16 per cent to 15–17 per cent for FY22.

In rupee terms, it pegs Q2FY22 revenue at Rs 29,784 crore, up 21.2 per cent YoY and 6.8 per cent QoQ.

"We expect Infosys to post margin contraction of 90bps QoQ due to attrition related challenges, wage hikes and deal transition costs. However, some part of the hike is likely to be offset by strong volume growth and better cost control and efficient execution. For Infosys, we would keenly watch out for the movement in attrition, a key variable in our view," the brokerage said.

On the net profit front, the brokerage eyes an 8.2 YoY rise to Rs 5,242 crore. On QoQ basis, the growth is expected to be flat at 0.9 per cent, it said.

Reliance Securities
The domestic brokerage expects Infosys to post a 7.4 per cent YoY jump in Q2 PAT at Rs 5,209 crore. Sequentially, it eyes only a 0.3 rise in the figure. Meanwhile, the revenue for the said quarter is seen at Rs 29,274 crore, a growth of 19.1 per cent yearly and 4.9 per cent sequentially.

It expects Infosys to raise FY22 revenue growth guidance to 14-16 per cent and reiterate FY22 EBIT margin in the range of 22-24 per cent. As for the current quarter, we expect a decline in EBIT margin of 150 bps (QoQ) primarily due to wage hike and stepped up hiring, the brokerage said.

Large deal activity, the outlook of BFSI vertical, attrition trend and capital allocation policy are some of the key points to watch out for as per the brokerage.