India’s second largest IT services exporter Infosys, led by CEO Vishal Sikka, is expected to report a 3% sequential rise in the first quarter revenue though its operating profit margin (OPM) may take a hit due to wage hikes and visa costs, according to brokerage reports.
Infosys, which saw a challenging FY15 with modest revenue growth, is expected to start reaping the benefits of some of the measures taken in the last fiscal. “Expect Infosys to report a 3.25% quarter-on-quarter dollar revenue growth (3.5% constant currency terms) and a margin contraction of 92 basis points from wage costs/visa counterbalanced by rupee depreciation,” CLSA said in its note.
In the fourth quarter of FY15, Infosys reported a sequential revenue decline of 2.6% in dollar terms, which had lowered the expectations of the markets. For FY16, it has given a revenue guidance of 10-12% in constant currency which is expected to be retained for the fiscal.
Credit Suisse in its note said, “Infosys’ relative re-rating in recent quarters bakes in a narrowing of the gap in growth relative to top peers. Management has also been sounding reasonably confident about its turnaround prospects.”
Infosys under Sikka undertook fresh initiatives like design thinking, also stepping up its sales engine and customer engagements. Sikka has set an ambitious target of $20 billion in revenue by 2020 with around 30% operating profit margins.
Kotak Institutional Equities which has also estimated a 3% sequential growth for Infosys, led by BFSI and retail verticals, expects progress on key metrics for a turnaround. These would be improvement in growth rates in infrastructure services, further reduction in attrition rates and improvement in client metrics.
However, the IT major will find it challenging to hold on to its OPM due to twin pressure of wage hikes and increased visa costs in the first quarter.
Goldman Sachs in its note said, “We forecast EBIT margin to decline by 70 bps quarter-on-quarter on account of promotions, wage hikes and visa costs partially offset by improving utilisation.”
“Wage hikes and visa costs may have a 250 basis points impact in the quarter which may be partly offset by currency tailwind and productivity gains. We expect a 190 bps quarter-on-quarter contraction in margins in Q1 FY16,” said Credit Suisse.
However, the greater focus on Infosys would be its commentary on the future business outlook and the key technology trends affecting the sector. Some of the key metrics to be watched for Infosys would its margins, overall demand environment, ramp up of its projects and attrition.