Infosys earnings: Watch out for Murthy's strategy, margins outlook

All eyes are on IT major Infosys, which will report its earnings for the April-June quarter tomorrow.

According to a CNBC-TV18 poll,analysts on an average see Infosys net profit declining 3.3. percent on quarter to Rs 2,315 crore, while its rupee revenue is expected to rise 5.5 percent to Rs 11,029 crore.

Analysts, however, expect the company's dollar revenues to increase 1 percent quarter on quarter to $1.96 billion.

Brokerage firm Emkay expects Infosys margins to decline by around 50bps QoQ because of full quarter impact of onsite wage hikes and ramp-ups on large business IT deals.

US Dollar revenues will likely increase 1 percent sequentially to $1.96 billion, according to analysts' estimates.

It also expects Infosys to retain its annual growth guidance despite a slow first quarter, financial year 2014, due to an improvement in the overal client-spending environment.

"The management commentary on likely margin trajectory ahead would be welcome, given that Infosys' margins have slipped for 5 quarters in a row and are down by more than 700 bps since Dec'11 quarter levels," it added.

However, Ambit Capital expects Infosys to lower its guidance to 5-9 percent to reflect the cross-currency impact of 100 bps.

Whatever be the numbers', it will be Narayana Murthy's comments that will be the key thing to watch out for. The other important aspects to watch out for will be any management commentary about margins and the impact of US immigration bill.

Strong growth outlook in US to help IT



The strongest growth outlook for US demand for information and communication technology since the 2008 financial crisis is likely to help Narayana Murthy revive Infosys , the Indian IT giant he founded, but the updraft will also boost its faster-growing rivals.

India's second largest computer services exporter, once seen as a bellwether for India's $108 billion IT industry, derives 62 percent of revenues from North America, a larger share than competitors Tata Consultancy Services Ltd , HCL Technologies Ltd and Wipro Ltd.

Technology consultancy Forrester Research forecasts an improving economy to spur US businesses and government bodies to increase information and communications technology purchases by 6.1 percent in 2014, the steepest gain since growth of 5.8 percent in 2010, which followed a contraction in demand during the global financial crisis.

Growth in 2013 is forecast at 5.7 percent.

"The demand environment is now quite solid," said Ganesh Natarajan, CEO of mid-sized Indian IT outsourcer Zensar Technologies. "This is the right time for all the pent-up customer demand."

Infosys last month returned Murthy to the helm more than a decade after he stepped down as chief executive to help reverse falling market share and end two years of disappointing results.

The Bangalore-based company, which reports its June quarter results on Friday, has struggled to reap the rewards of an initiative to generate a bigger share of its revenue from proprietary software, and has lost market share to Tata Consultancy and HCL in recent quarters.

Concerns over US visa rules

Several analysts expect Infosys to retain its April forecast of 6-10 percent revenue growth for the fiscal year that ends next March. Morgan Stanley, however, last week said Infosys may cut that forecast to 4-6 percent.

Infosys' outlook lags the 12-14 percent growth estimated for the sector in financial 2013/14 by the National Association of Software and Services Companies, an Indian industry group.

"IT services from a macro perspective is looking good. Now within the gamut of IT companies, all of them may not uniformly benefit," said Tarun Sisodia, a director at IT industry advisory firm Chanakya Niti Consultancy Pvt Ltd.

Looming large over all Indian IT companies is the possibility that the United States, the sector's biggest market, will implement as early as next year new visa rules that will make it more costly and difficult to send workers there.

The visa restrictions may prompt clients to delay outsourcing contracts.

A Bloomberg report, quoting Urmil Shah, a Mumbai-based analyst at Kim Eng Securities, said "The immigration bill is compounding problems and is really the biggest fear across the industry, but especially for Infosys which is already being surpassed by the competition.. Fiscal 2014 won't be a great year for Infosys, with client sentiment toward the industry dimming."

Management challenges

Infosys also faces management challenges. The head of sales said on Tuesday he had left, and investors have voiced concerns that the company is too reliant on its founders for leadership.

"A people disadvantage exists today at Infosys," Sisodia said. "There is a people advantage at Tata Consultancy."

Shares in Infosys have risen 4.1 percent since Murthy returned to the company on June 1, in line with gains in the IT sector.

With inputs from Agencies

Updated Date: Dec 20, 2014 22:15 PM

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