Infosys Q3 results today: Earnings may be tepid but guidance to be in focus

After new CEO Salil Parekh took charge on Jan 2, the company's revenue guidance and software strategy under the new leadership will be keenly watched today

Infosys Technologies, the country’s second-largest software services firm, is scheduled to report its earnings for the September-December quarter on Friday. This quarterly earnings report of the company will be keenly watched for the guidance it gives under its new chief executive officer (CEO) Salil Parekh.

If terms of earnings, if analyst estimates are anything to go by, Infosys’ third-quarter show could be rather tepid.

According to analysts, investor focus will be on the company’s strategy, especially pertaining to the focus on development/promotion of proprietary software versus adoption of third-party products/platforms and M&A strategy. The demand outlook for the 2018 calendar year, total contract value of deal wins, pricing outlook and progress on automation will also affect future earnings outlook.

For Infosys, one boost in December quarter earnings might come from reverse tax provisions of about $225 million made in previous years after signing an advance pricing agreement with the US Internal Revenue Service.

The IT major’s profit for the July-September quarter had grown by 7 per cent sequentially to Rs 37.26 billion, but it had slashed its full-year constant currency revenue growth guidance to 5.5-6.5 per cent. The company’s revenue during the quarter had risen 2.9 per cent to Rs 175.67 billion and dollar revenue had grown by 2.9 per cent to Rs 27.28 billion over the previous quarter.

Revenue growth in constant currency terms was 2.2 per cent for the quarter.

Here’s how top brokerages expect Infosys to have performed in the December quarter:

Motilal Oswal Securities

The brokerage estimates Infosys’ profit after tax (PAT) to be Rs 35.3 billion, down 5.4 per cent (QoQ), led by lower profitability and lower other income. The company is expected to achieve the mid-point of its constant currency (CC) guidance for FY18, with 0.9 per cent (QoQ) revenue growth expectations for Q3 (1.0 per cent in CC), and 1.5 per cent in the following quarter

Ebitda margin is likely to contract by 40 bps (QoQ) to 26.4 per cent, led by continued investments in the business and the fact that operational efficiency levers have been squeezed materially over the past few quarters. Ebit margin may be 23.6 per cent, at the lower end of the revised profitability guidance range of 23-25 per cent.

After the September FY18 quarter, the IT major had revised down its FY18 guidance to 5.5-6.5 per cent YoY, implying an ask rate of 0.4 per cent to 1.6 per cent for the second half of FY18.

Reliance Securities

The company’s dollar revenue is expected to rise by 1.5 per cent QoQ (1.6 per cent QoQ in constant currency terms). Meanwhile, margin improvement is likely on operational efficiency and rupee depreciation.

The brokerage says: “Change in FY18 guidance and possible follow-through impact on FY19 is likely due to senior management change, finer points of new CEO Salil Parekh’s strategy to grow the business and any client-specific impact.”

Kotak Securities

The brokerage expects revenue growth of 1.2 per cent in constant currency terms and negligible cross-currency impact. Ebit margin is likely to remain flat but the impact of weakness in revenue growth would be offset by operational efficiencies.

The company is likely to maintain a guidance of 5.5-6.5 per cent revenue growth in constant currency terms and 23-25 per cent Ebit margin.
(Kotak Mahindra and associates are predominant shareholders in Business Standard Pvt Ltd)