Better earnings expected for Infosys this quarter

Sikka strategy in focus, margins seen up 30-60 bps, FY15 forecast may not change

A better demand environment and lower costs are expected to aid Infosys, the country’s second largest information technology (IT) services company, to post a sequential improvement in financial performance for the July-September quarter (Q2 of 2014-15).

More than the figures, analysts and investors are focused on new chief executive officer Vishal Sikka’s comments about his strategy and vision.

Chief Operating Officer U B Pravin Rao had in an investor conference during August said internal discussion was on and a course of action might be introduced by October. Friday would be the first time when Infosys details its quarterly earnings after Sikka took charge on August 1. In view of his past role as chief technology officer of Germany-headquartered SAP, he is expected to give a big thrust on digital technologies and innovation. Additionally, amid reports of Sikka bringing in several of his former SAP colleagues on leadership roles, analysts are expecting some clarity on how new roles would be carved out for them, while ensuring no disruption among the existing staff.

There is curiosity if he will continue with the strategy initiated by co-founder Narayana Murthy last year. This included focus on cost rationalisation, sales effectiveness and delivery effectiveness. Infosys has been struggling to revive high growth for two years.



“Infosys has managed costs well over the past three to four quarters but the near-term margin trajectory will depend largely on the new CEO’s strategy,” said Credit Suisse in a pre-earnings note. “The absence of visa and wage increase costs (which had a negative impact of about 300 basis points in the first quarter) might be offset to a large extent by investments and possible contraction in utilisation.”

For Q2, revenues are expected to have grown around three per cent over Q1 and the margins to have expanded by 30-50 basis points (bps) sequentially, mainly as most of the significant costs like visa charges and salary increments were made during April-June. On the higher end, JPMorgan estimates Infosys' margins to expand by around 60 bps due to “modest rupee depreciation versus the dollar and gains from cost-optimisation measures”.  

“We believe FY15 could go as a year of transition for the company, with the appointment of the new CEO. We believe Infosys would retain its revenue growth guidance of 7-9 per cent for FY15,” said HDFC Securities.