Infosys Q1 Result Preview: Expect softer revenue, a decline in margins

Apart from the numbers, investors will focus on management commentary on FY24 guidance along with an outlook on discretionary spends, deals, margins and attrition.

Because of project cancellations, brokerage firm Motilal Oswal Financial Services expects Infosys to report muted revenue growth. The brokerage firm also sees the risk of guidance moderation for FY24.

As per the estimates of Motilal Oswal, Infosys may see a 9.8 per cent year-on-year (YoY) rise in revenue in rupee terms. Profit after tax (PAT) may rise 17.8 per cent YoY and 3 per cent quarter-on-quarter (QoQ), Motilal said.

“Operating margin may decline by 100 bps, due to muted revenue performance and wage hike. Deal wins may remain resilient. Infosys has a few mega deals in the pipeline. Outlook on discretionary spends, deals, margins, and FY24 guidance are key things to be watched out for,” said Motilal Oswal.

As per the estimates of Kotak Institutional Equities, Infosys’ Q1FY24 revenue may rise 9.8 per cent YoY and reported PAT may see a 14.1 per cent YoY growth.

The brokerage firm said the low base of the March 2023 quarter, which also included revenue reversals (close to one per cent of revenues), sets the platform for moderate growth in the quarter. High billing days also help.

Kotak said the headwinds include the full quarter impact of project cancellations that occurred in March 2023 and general weakness in discretionary spending, especially in North America.

“We expect a 30 bps QoQ decline in EBIT margin. Headwinds in the quarter are in the form of higher variable compensation (nearly 80 per cent versus 60 per cent in the March 2023 quarter) leading to a 100 bps impact,” said Kotak.

“Provision for post-sales client support (as opposed to reversal) is another 30 bps headwind. Tailwind is largely in the form of normalisation after 90 bps impact in Q4FY23 due to revenue reversals. We have not assumed wage revision in our model. Deal

TCV (total contract value) and pipeline will take centre stage. Large deals will be in focus while the quantum of pipe, nature of large deals, the pace of decision-making and drivers of consolidation trend will be important focus points,” Kotak said.

Kotak expects healthy TCV of wins powered by large deals and expects Infosys to retain 4-7 per cent revenue growth guidance. The EBIT margin guidance band of 20-22 per cent will stay unchanged. The focus will be on senior management attrition after a couple of senior leadership exits, the brokerage firm said.

“We expect investors to focus on (1) mega-deal closures that are critical to achieving back-ended revenue growth guidance, (2) factors that provide comfort in achieving back-ended revenue growth guidance, (3) margin levers, especially noting that back-ended growth guidance is based on typical margin-dilutive large and mega-deals, (4) discretionary spending environment, especially in impacted verticals, and (5) reasons for senior leaderships exits and replacements,” said Kotak.

Brokerage firm Phillip Capital expects current currency (CC) revenue growth of +0.8 per cent QoQ on a weaker base of Q4. The brokerage firm said demand uncertainty in BFSI, telecom, hi-tech and retail may lead to a weak start for FY24.

“Margins are expected to remain flat as efforts from pyramid optimization, utilization, and sub-con will be offset by likely increase in travel and facility costs. We have not assumed wage hikes for Infosys in Q1. We expect Infosys to retain its guidance of 4-7 per cent CC revenue growth and 20-22 per cent EBIT margin guidance for FY24. Watch out for FY24 guidance update, vertical outlook, deal TCVs and pipeline, margin levers, attrition and pricing,” said Phillip Capital.

Shares of Infosys declined about a per cent in morning trade on BSE today. At 12:10 pm, the stock was 0.41 per cent down at ₹1,468.90 on BSE.

Infosys shares hit their 52-week high of ₹1,672.45 on December 1, 2022. As of July 18 close, the stock is down nearly 12 per cent from its one-year high.

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Updated: 19 Jul 2023, 12:21 PM IST