Seasonality to aid Infy in Q1 but Q4 spillover challenges likely

Revenue seen up 1.8-3.0% QoQ; margins seen down over 200 bps; attrition to top Q4

India's second largest information technology (IT) services company, Infosys, is seen getting some tailwind from seasonal improvement in business during April-June 2014 (Q1FY2015). However, analysts and experts are not quite upbeat about the company's performance during the quarter as challenges in repeat business and new deal wins may lead it to lag peers.

The Bangalore-based company, which will detail its earnings for Q1FY2015 on July 11, 2014, is estimated to post a 1.8-3.0% quarter-on-quarter growth in revenue for the quarter. This is far lower than the estimates for peer Tata Consultancy Services, which is seen posting at least five% sequential increase in topline.

Infosys had closed FY14 with a revenue growth of 11.5% in dollar terms, which was close to the lower end of its guidance of 11.5-12.0%. Additionally, Chief Executive Officer S D Shibulal had said the company's performance during January-March 2014 (Q4FY2014) had taken a hit due to "mismatches between skills that clients need and what we have". Analysts expect the company to have seen similar issues during Q1FY2015 as well.

"We expect Infosys to report 2.3% sequential revenue growth," said Kotak Institutional Equities in a research report. "Infosys will benefit from the seasonal improvement in business as well, but spillover of some of the challenges it faced in 4QFY14 will mean it will trail peers in terms of growth."

In line with peers, Infosys may see an erosion in operating profit margins for Q1FY2015, primarily due to salary increments for employees and high visa costs incurred during the quarter. Due to these reasons, the company's margins for Q1FY2015 are expected to decline 210-240 basis points from 25.5% in Q4 of FY2014, despite getting around 50 basis points support from cross currency benefits and cost rationalisation measures.

While brokerage firm Motilal Oswal expects Infosys' operating profit margins to decline 240 basis points sequentially, Ankita Somani of MSFL Research has estimated a 222 basis points erosion in margin.

Among others, employee attrition will be one of the most closely watched metrics, as Infosys had posted an all-time high attrition rate of 18.7% in Q4 of FY2014. With the company still in the midst of transition, most experts expect attrition to be higher during Q1FY2015.

Investors will also closely watch out for any management comments about Infosys' strategic direction post the management changes. The company had last month announced the appointment of Vishal Sikka as its CEO, with effect from August 1, 2014. The former chief technology officer and member of executive board at German technology major SAP, Sikka, is widely seen as an ace technocrat, who many believe will bring out significant transformation at Infosys.

Most analysts expect the company to retain its revenue growth guidance of seven-nine% for FY15, which is much lower than industry body Nasscom's estimate of 13-15%. According to a back-of-the-envelop calculation, the company needs to grow between two and three% in each quarter to achieve its growth projection for FY15.

"Given the ongoing management transition at Infosys, we don't expect any material change in the company's guidance," Religare Institutional Research said in a note. "We note the macro climate in developed markets is improving and remains supportive of the sector. That said, a sharp appreciation in the rupee remains the key risk to our estimates."

INFY Q1 IN FOCUS

* Revenue growth seen 1.8-3.0% QoQ

* Margins seen down over 200 bps on wage hike, visa cost

* Attrition likely to top all-time high of 18.7%

* Challenges of previous quarter to weigh in Q1

* Strategic direction post management change eyed

* FY15 revenue growth guidance of 7-9% may be left unchanged

* Initiatives to restrain rising attrition to be keenly watched