Infosys Q2 Preview: IT major Infosys is all set to report its earnings for the second quarter of FY24 on October 12. The tech giant is likely to report a muted growth for the September quarter amid weak discretionary spends and also slower deal ramp-ups. This is despite strong deals cracked during the period that is expected to lend comfort to the future growth trajectory, analysts said. Per the experts and analysts, continued rationalisation of discretionary programmes, along with extended timelines for execution of existing ones is leading to the leakage of revenues and weak trends. A report by Kotak Institutional Equities said that Infosys has already absorbed the hit of the guidance cut and has low expectations running into the quarter.
“We forecast muted sequential revenue growth of 0.6 per cent in c/c. The YoY growth rate is expected to slow down to a mere 0.5 per cent. Continued rationalization of discretionary programs is likely to impact growth. We forecast a 22 bps QoQ and 97 bps YoY decline in EBIT margin. We do not assume any wage revision in our estimates. The decline in margin is largely due to increase in travel and other costs. We expect large deal TCV announcements of $5.5-6 bn,” said Kawaljeet Saluja, Head of Research, Kotak Institutional Equities.
“We expect unchanged revenue growth guidance in the band of 1.0-3.5 per cent in c/c. The EBIT margin guidance band is likely to stay unchanged at 20-22 per cent. It is realistic to assume that Infosys will achieve the mid-point of the revenue growth guidance band and marginally lower than mid-point for EBIT margin,” he added.
According to a poll by CNBC TV18, Infosys is expected to post Q2 revenue at Rs 38,425 crore and the quarter profit at Rs 6,225 crore. It said that CC revenue growth is seen at 0.9-1 per cent which is similar to Q1 levels of 1 per cent. FY24 guidance is likely to remain unchanged, it said.
Dhruv Mudaraddi, Research Analyst, StoxBox, said, “In its Q2FY24 earnings report, Infosys is expected to reveal relatively subdued financial performance as the demand environment has not seen much change since the June quarter barring a few mega deal closures. We expect certain pockets in banking and financial services and discretionary spending in retail to witness continued pressure. We expect a single-digit annual revenue growth, with CC revenue growth likely to remain flat.”
Further, Kumar Rakesh, Analyst – IT & Auto, BNP Paribas India, said, “We expect Infosys to narrow its FY24 CC YoYrevenue growth guidance to 2-3.5 per cent from 1-3.5 per cent previously and maintain an EBIT margin range of 20-22 pe rcent. We expect USD revenue growth of 0.9 per cent q-q (+0.8 per cent QoQ in CC) due to the continued impact of a slowdown related to a cut in discretionary tech spending. We are building a one month contribution of the Danske Bank deal for the quarter.”
Amit Goel, Co-Founder & Chief Global Strategist , Pace 360, said, “We believe that the company’s revenue is poised to rise by 1.50 per cent on QoQ basis, reaching Rs 38,503 crore, showcasing steady growth from the previous Rs 37,933 crore. Our optimistic outlook extends to the company’s operational performance, with the expectation of 1.34 per cent increase in operating profit on a QoQ basis, projecting it to reach Rs 8,089 crore compared to the prior quarter’s Rs 7,982 crore.”
Meanwhile, Apurva Prasad, Vice President – Institutional Research, HDFC Securities, said that the overall IT sector is expected to deliver a soft quarter, although Q2 has historically been a seasonally strong quarter. “We expect the sector’s revenue growth to recover to ~9 per cent in FY25E, following ~4 per cent in FY24E; the margin is expected to improve in FY25E, following a flat trajectory in FY24E. We increase estimates for HCL Tech and Infosys to factor better near–term visibility, supported by the ramp-up of the recent large deals, and roll forward target valuation to Sep-25E EPS.”
Key monitorables
In terms of key monitorables, Kumar Rakesh from BNP Paribas India said that investors will look out for “performance of impacted verticals such as BFSI, retail, hi-tech and telecom; FY24 revenue and margin outlook; risk of macro headwinds on demand and demand outlook; core market’s (US and Europe) performance; timeline of large deal win ramp-ups and pipeline; investments in GenAI partnerships and solutions; comments around pricing and utilisation; and performance of top accounts”.
Kawaljeet Saluja from Kotak Institutional Equities, added, “Focus will be on senior management attrition, after multiple senior leadership departures. We expect investor focus on: (1) profitability dynamics of mega deals, (2) commentary on the ramp-up timelines of mega deals to provide comfort on better revenue growth in the latter half of the year, (3) margin levers, especially noting that back-ended growth guidance is based on typically margin dilutive large and mega deals, (4) discretionary spending environment, especially in impacted verticals, (5) reasons for senior leadership exits and replacements and (6) effective date for wage revision.”