5 things to watch out for in Infosys Q2 results today
Infosys needs to grow at least 2.4% in the September quarter (Q2) to report 6.2% full-year dollar revenue growth
New Delhi: The heartening development at Infosys Ltd is that 10 months into his role as chief executive officer, Salil Parekh is firmly in control of India’s second largest information technology (IT) services firm. But this aside, the mood at the company is edgy. Attrition has remained high even as senior management departures continue to rock the firm. Many within, and outside, Infosys are not sure if the company is benefiting from the uptick in demand for IT services. Again, Infosys has tried to bury the ghost of the Panaya acquisition and has spent $151 million to buy two firms in the last six months. Still, some analysts remain unconvinced about the firm’s digital strategy and how the company is looking to differentiate itself from its rivals.
Its larger rival Tata Consultancy Services Ltd has grown, year-over-year, in double digits for three straight quarters: TCS reported 11.7% y-o-y dollar revenue growth in the January-March quarter, followed by 10% growth in both April-June and July-September. Infosys’s y-o-y growth slipped to 6.8% in the first quarter of the current financial year from 9.2% in the fourth quarter of the last financial year.
Infosys’s second-quarter earnings, to be declared on Tuesday, will be an important marker to know the firm’s full-year growth. The second half of the year (October-March) is tepid for home-grown IT firms. Infosys reported 0.9% sequential dollar revenue growth in the first quarter. Even if the company manages to grow by 1% in both the third and fourth quarters, Infosys needs to grow at least 2.4% in the July-September period to report 6.2% full-year dollar revenue growth, according to Mint analysis. Infosys had outlined dollar revenue growth of between 7% and 9% at the start of the current year.
TCS, on the back of 1.6% and 3.2% growth in the first and second quarter, respectively, will see full-year dollar revenue growth of 9.25% if it grows 1% in both the third and fourth quarters.
An over 300-basis point difference between full-year growth of the two companies, along with a 300 basis points gap in profitability, is one reminder why TCS trades at a premium to Infosys.
So can Infosys cheer investors before the Diwali festival next month? Mint highlights five things to watch for in Infosys’s second quarter results that will be declared on Tuesday.
1. Revenue growth and management commentary for the financial year: Infosys is estimated to post sequential dollar revenue growth of 2.4% in the July-September period, according to an analyst at brokerage JM Financial Institutional Securities Ltd. This is higher than the 0.9% sequential growth recorded in the first quarter. Management commentary on the demand outlook for the second half of the current financial year, with the October-March period being tepid for IT services, will be crucial.
2. Performance in key geographies and industry segments: The US accounts for 60% of Infosys’s total revenue. Clients in the banking and financial services industry, or BFSI, bring 32% of the business. The last quarter saw growth remaining flattish in both these segments. Expectedly, management commentary and the impact of insourcing by large banks will be eyed.
3. Growth in digital: Infosys’s digital business grew 25.6% in constant currency terms and accounted for 28.4% or $803 million of company’s $2.83 billion revenue in the April-June quarter. One of the reasons behind TCS’s early uptick in performance has been the scorching growth in digital: TCS’s digital business grew 60% y-o-y in the second quarter.
4. Attrition retention measures: During the first quarter, Infosys reported an industry-leading attrition rate of 23%. Management has tried every trick in the bag to retain employees: from monetary benefits to promotions to even relaxing rules to allow employees to work from home. For this reason, the company’s ability to retain talent and attrition numbers will be important.
5. Update on the Panaya purchase process and severance payments to former CFO: At the end of the June quarter, Infosys had already written down 59% or Rs 854 crore from the Rs 1,398 crore it paid to buy Israeli automation firm Panaya. Last month, an arbitration panel had directed Infosys to pay Rs 13.58, including interest, as part of the outstanding severance to the company’s former chief financial officer Rajiv Bansal. Infosys had said it would seek legal advice. An update on the progress of the Panaya purchase and if Infosys will pay Bansal the remaining money as part of severance will be important as it helps the firm bury the developments of the past.
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