Infosys Q4 preview: Will high costs dent margin? What top brokerages expect

Infosys Q4 preview: After Indian IT heavyweight Tata Consultancy Services (TCS) posted strong set of earnings in the fourth quarter that ended in March 2022 (Q4-FY22), analysts expect Infosys to deliver revenue growth between 2.4-3.2 per cent in constant currency terms (CC) on sequential basis, led by momentum in financial services, retail, communication, energy, and manufacturing. Infosys had reported 7 per cent revenue growth in the last quarter, beating Street estimates.

Analysts expect the Bengaluru-based firm to post flat-to-negative EBIT margin due to higher attrition, lower utilisation, and rising travel expenses. The company’s margin stood at 23.4 per cent the previous quarter.

On the operational front, Infosys, too, struggled with high attrition as the voluntary attrition rate skyrocketed to 25.5 per cent in the December 2021 quarter. Investors will keenly track if the management will retain its margin guidance of 22-24 per cent this Q4. Meanwhile, moderate growth in net profit is expected on a quarterly basis, on the back of healthy deal wins and broad-based growth across verticals.

At the bourses, Infosys has slumped over 6 per cent so far this year. However, it has outperformed its peers like HCL Technology, Wipro, Tech Mahindra that lost 14.45 per cent, 20.49 per cent, and 19.02 per cent respectively during this period.

Factors to watch out

Management's commentary on how the demand environment will play out in FY23, guidance on revenue and margin, clients’ IT spending amidst geopolitical tensions and macro headwinds like rising inflation, growth in verticals - especially retail and BFSI, ramp up of Daimler deal, traction in digital technologies, deal closure momentum or pipeline, margin outlook given rising attrition rate, and pricing outlook will be keenly watched.

Here is what leading brokerages expect from Infosys when it announces its Q4FY22 numbers on Wednesday, April 13.

Axis Securities: Analysts expect Infosys to register 3 per cent QoQ growth in CC terms, whereas, 2.7 per cent dollar revenue growth. Meanwhile, they expect higher employee cost to dent margin by 30 basis points (bps) QoQ. Profit-after-tax (PAT), they believe, is likely to improve by around 1.9 per cent QoQ due to a healthy deal pipeline.

ICICI Securities: The brokerage, too believes, strong deal wins to help the company post strong revenue growth of 2.4 per cent QoQ. Analysts also remain assertive of healthy margin expansion by 461 bps QoQ, owing to favorable currency mix and strong volume growth.

Prabhudas Lilladher: Analysts expect healthy deal momentum to continue with higher share of mid-sized and small deals. The brokerage firm pencils in a modest revenue growth rate of 3 per cent QoQ cc in a seasonally weak quarter. They also believe that the company is poised for market share gains due to supply side impact in Ukraine for Eastern European IT services.

Sharekhan: The brokerage firm sees higher adoption of digital transformation and broad-based growth across verticals to drive revenue growth to 2.1 per cent QoQ in CC terms. With higher subcontractor expenses and lower utilisation rate, analysts expect EBIT margin to contract by 49 basis points (bps).

JM Financial: The brokerage is baking in 3 per cent QoQ revenue growth in CC terms with 40 bps cross currency headwinds translating into 2.6 per cent QoQ revenue growth in dollar terms. Analysts expect a stable EBIT margin at 23.4 per cent in Q4, with management guiding 100 bps dilution in margin band due to pressure from travel resumption.