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Infosys Ltd.’s Q4 earnings will likely be marred by continued weak discretionary spending in the US, with revenue falling and net profit little changed quarter-on-quarter. The Street expects the operating margin to expand moderately as cost optimisation continues under Project Maximus.
India’s second-largest information technology company is set to declare its January-March earnings on April 18.
Seasonal impact will weigh on revenue, which may decline 1.1 percent sequentially to Rs 38,413 crore, according to the median estimate of 13 brokerages polled by Moneycontrol. Profit after tax is expected to remain flat both sequentially and YoY at Rs 6,128 crore, according to the estimates, dragged by lower revenue but supported by margins.
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Moneycontrol’s consensus estimates indicate the company’s operating margin will expand by 20 basis points sequentially, but analysts are divided. Brokerages Nuvama and ICICI Securities expect its operating margin to fall, while Axis Securities, Nomura, Emkay Global and Jefferies expect it to expand.
Brokerages said operational efficiencies and lower onsite expenses will likely aid growth of margins, while being offset by wage hikes, higher visa costs, some furloughs, and revenue decline. Infosys rolled out wage hikes effective November 1, 2023, covering the entire employee pool.
Eyes on guidance
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Most brokerages expect Infosys to maintain its revenue growth guidance in the range of 2-7 percent for the financial year, even as a recovery in discretionary spending by clients remains elusive.
Analysts at ICICI Securities are the most conservative, pegging the range at 1.5-2 percent, while brokerage Antique is the most optimistic, expecting growth guidance of 5-7 percent.
“Channel checks and peer commentaries do not indicate any immediate pick-up in short-term discretionary projects, with cost optimisation still imperative,” Axis Securities wrote in a pre-earnings research note.
Riding on continued cost optimisation, analysts expect Infosys to maintain its operating margin guidance for FY25 in the range of 20-22 percent.
Also Read | Q4 earnings preview: Mid-tier IT revenue growth may beat large firms, low US spends continue to hurt
Demand woes
Infosys’ larger rival Tata Consultancy Services declared its fourth-quarter results on April 12, and indicated that clients are still cautious on IT spending. Discretionary IT spending has not picked up and the focus on cost optimisation continues.
The fourth quarter is usually weak because of the seasonality factor, which results in muted sequential growth. In terms of sectors, manufacturing, energy and utility, and life sciences are doing well, whereas banking, financial services and insurance (BFSI), luxury retail, hi-tech, and telecom continue to be under pressure.
“Deal pipeline is strong, and deals won in the previous quarter are ramping up as expected. We expect orderbook to be in line with average quarterly run-rate of $2.5-3.5 billion,” ICICI Securities said in a research note.
Brokerage JM Financial said it expects limited contribution from mega deals in the fourth quarter.
“Contribution of Infosys’ net new large deals (over $50 million) will likely be offset by run-down of smaller deals,” the brokerage said.
Also Read | TCS Q4 results: Net profit rises 9% to Rs 12,434 cr, firm declares final dividend of Rs 28 per share
Nuvama Institutional Equities is an outlier on this front, estimating steady deal wins and conservative commentary on the demand environment.
Nomura said its interactions with companies suggest demand has remained sluggish.
“Recent guidance cut from Accenture also points to tightening in client spending,” the brokerage said.
Share buyback
Various brokerages expect the Bengaluru-based company to announce a share buyback on April 18. The software exporter last bought back shares worth Rs 9,300 crore in February 2023.
“We expect Infosys to announce a buyback of Rs 100-110 billion, in line with capital allocation policy,” said Axis Securities.
The Street will also await management commentary on customer sentiment and discretionary spending as well as expected ramp-up schedule of deals won in FY24.
Other monitorable aspects include vertical-wise commentary, deal total contract value (TCV) and pipeline, margin levers, attrition, pricing, and hiring plans.
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