Infosys Q2 results out today: What to expect

Markets are betting on on India’s second-largest software outsourcer Infosys to deliver robust, second-quarter earnings this morning. The company is seen raising its sales outlook for the 2013-14 fiscal yearas its financial performance will set the tone for the rest of the IT earnings this quarter.

Infosys, once a bellwether of India’s IT industry, has steadily lost its appeal among investors after two years of disappointing results. However, this quarter, it has emerged as a top pick in the IT space ahead of the earnings announcement, as experts expect it to gain from rising discretionary spend in the US from where the company earns over 60 percent of its revenues.

Ever since Narayana Murthy walked back on to Infosys’ sprawling Bangalore campus, cost-cutting has been a particular focus, following concerns about Infosys’ bloated foreign operations, especially in the US, where it earned two-thirds of its $7.4bn revenue last year.

Infosys shares have gained over 20% in the past three months, when broader market remained flat. During the same period, the sectoral index of IT stock gained about 28% on the back of rupee depreciation.

According to_CNBC-TV18_poll, analysts on an average expect profit after tax of the company to rise by 10.2 percent quarter-on-quarter to Rs 2,614 crore during the September quarter.

Revenues are seen going up by 13.4 percent to Rs 12,781 crore in second quarter of FY14 from Rs 11,267 crore in previous quarter while dollar revenues may grow 2.6 percent Q-o-Q to $2042 million.

The market is expecting the company to perform better on the back of rupee depreciation, hopes of a pick-up in demand from the US and Europe, and also as sentiment turned positive after Narayan Murthy returned.

Revenue guidance

Everyone will be focusing on the dollar revenue growth guidance. The street is expecting it to announce guidance to 8-10 per cent against 6-10 percent,driven by a more aggressive sales strategy and demand revival in the US. An increase in guidance implies that growth has stabilised at the company.

At the end of first quarter, the company guided the FY14 dollar revenues growth of 6-10 percent (as against NASSCOM forecast of 12-14 percent for IT industry) to $7842-$8138 million.

“The market will watch out for and change in the FY14 revenue guidance by Infosys. The return of Narayan Murthy to Infosys has raised hopes on the medium-to-long term prospects of the company. Based on our expected revenues in Q2, we expect the company to increase the guidance range,” Kotak Securities report said.

“Dollar revenue growth and guidance revision are the things to look out for, but the street will also keenly watch management commentary on the ongoing leadership changes,” said IDFC Securities.

Nomura Financial Advisory and Securities expect the software firm to raise its FY14 revenue growth guidance to 9-11% (from 6-10%).

“Deal wins and discretionary demand commentary suggesting a pickup in growth will be a positive catalyst for the stock,” the firm said.

Margins

Margins of the software services provider could improve sequentially by around 30 basis points, according to the CNBC-TV18 poll.

Adverse impact of wage hike can be more than balanced by benefits from currency depreciation and higher utilisation during the quarter. Also the company has been very focused on cost cutting, especially onsite costs.

Profit margins are expected to rebound over the next two quarters as result of ongoing cost-rationalisation.

Infosys beat muted expectations in the June quarter and its shares jumped as much as 15 percent on the day first quarter earnings were announced. Still, Infosys shares have underperformed peers such as TCS and HCL Tech over the July to September period.

Investors need to watch out for - 1) Management stability, 2) progress on revival plan 3) deal wins 4) pricing for Infosys has been under pressure 5) how will Infosys re-invest currency benefits 6) view on margins 7) management commentary and 8) cash on books.

Management stability is key

Several analysts, however, are worried about the future leadership since a string of senior departures have followed ever since Murthy returned

Basab Pradhan (Infosys’s global head of sales), Ashok Vemuri (Head of the US and manufacturing vertical) and four senior managers left the company during September quarter.

Even the appointment of Murthy’s son Rohan raised several eyebrows given Infosys’ strict rules forbidding founders’ family members from senior roles.

As Financial Times points out, "resulting lack of heavyweight internal candidates to lead the group when Mr Murthy eventually departs has also redoubled suspicions over the role being played by his son Rohan, who become his father’s executive assistant in June."