Q2 preview: Infosys may see de-rating if guidance is not revised up

Infosys is scheduled to announce its September quarter earnings on Tuesday. Information technology (IT) sector as a whole, analysts say, is expected to deliver an uptick in growth owing to robust demand environment, ramp-up in large deal wins and rupee depreciation. 

With TCS meeting street expectations last week while announcing its September quarter results, analysts expect Infosys, too, to follow suit. The IT major had reported 3.7 per cent year-on-year (y-o-y) growth in consolidated net profit at Rs 36.12 billion for the quarter ended June 30, 2018. Revenue from operations of the Bengaluru-based firm grew 12 per cent y-o-y to Rs 191.28 billion in the April-June quarter, as compared to Rs 170.78 billion in the year-ago period.

At the bourses, Infosys has surged 33 per cent on year-to-date (YTD) basis, as against S&P BSE Sensex's 2 per cent rise. The outperformance, analysts say, is partly on account of a depreciating rupee, which experts say, is likely to positively impact the company's earnings going ahead.

Here's a look at what leading brokerages expect from Infosys' Q2 results -

Edelweiss Securities

We expect revenues to grow 3.4 per cent quarter - on - quarter (QoQ) in CC (constant currency) terms, impacted 100 bps due to cross currency headwinds (US dollar growth 2.4 per cent QoQ). EBITDA margin is expected to rise 120bps QoQ on account of rupee depreciation benefits, the absence of visa cost and efficiencies will be offset by wage hikes to senior employees. Commentary on-demand environment, growth in digital, deal wins will be key monitorable. Maintained 'Buy' rating on the stock.

Motilal Oswal Securities

Compared to the weak start to FY19 (0.9 per cent QoQ CC growth in 1Q), we expect acceleration now, led by seasonal strength and an improvement in verticals like BFS, resulting in 3.5 per cent QoQ CC growth for 2QFY19. Cross-currency headwinds are expected to result in 2.7 per cent QoQ growth in US dollar terms. EBIT margin is expected to expand by 40 bps QoQ to 24.1 per cent, led by rupee depreciation, partly offset by wage hikes and variable pay. With margins expected at the higher end of its guided range and most pressures for the year behind, we expect Infosys to raise its annual EBIT margin guidance by 50bps. Our PAT estimate is Rs 41.5 billion (+7per cent QoQ), primarily led by higher growth and margin expansion. The stock trades at 19.6x FY19E and 16.3x FY20E earnings. It has maintained 'Buy' rating on the stock.

Sharekhan

We expect EBITDA margin to improve by 40 bps on QoQ basis despite rupee tailwinds and higher revenue growth, owing to significant investments in digital capabilities and salary hike for top management. Expect Infosys to maintain its CC revenue growth; however, EBIT margin guidance for FY2019 should be watched out for owing to the sharp depreciation of rupee; the contribution of digital business and its positioning from the competition point of view, demand environment outlook across verticals (especially BFSI) and geographies (North America), pricing outlook, progress on automation initiatives and monetisation of platforms, large deal wins and total contract values (TCVs) and attrition levels are some of the key monitorables.

Emkay Global Securities

We expect an OPM (operating profit margin) gain of nearly 50bps QoQ on account of rupee depreciation, led tailwinds and visa costs normalisation which will be partially offset by residual wage hikes (15per cent of workforce) and increased investments in (1) building Digital & Sales capabilities and (2) Training of employees. Net profit growth is driven by the absence of a one-time loss related to Panaya downgrade. Infosys could see de-rating if guidance on growth / OPM is not revised up.

HDFC Securities

EBIT margin is estimated at 24.4 per cent, +70bps QoQ and APAT (adjusted profit after tax) estimated at Rs 38.75 billion, 1.8/4.0 per cent QoQ/YoY. Expect revenue guidance of 6 to 8 per cent in constant currency terms to be unchanged.