Bengaluru: In January 2018, Salil Parekh became the second non-founder CEO and MD of Infosys Ltd after Vishal Sikka who resigned over visible differences with the founders. So far, Parekh has been largely successful in maintaining peace between the management and the founders and keeping Infosys away from media speculations. He has managed, what co-founder Nandan Nilekani said, to make Infosys “boring" again. But, industry-leading growth rates and high attrition remain serious concerns for the company, more so when its closest competitor Tata Consultancy Services (TCS) Ltd, which will declare its results today, has fared better. Can Infosys being cheer investors ahead of Diwali?
Mint highlights five things to watch for in Infosys’ second quarter (Q2) results that will be declared on 11 October.
Guidance for FY20
The company is expected to increase its revenue growth guidance for FY2020 on the back of strong large deal momentum and market share gains, given the visibility in revenue growth. “We expect Infosys to raise its constant currency FY20 revenue guidance from 8.5%-10% growth currently by at least ~50 basis points given reasonable arithmetic and momentum from the recent large deal wins," brokerage firm Emkay Global said in an earnings preview note. Prabhudas Liladher expects Infosys to raise its guidance to 9-10% from 8.5-10% it had guided during Q1 for FY2020, led by strong large deal wins in the past which helps provide visibility ahead.
Infosys is likely to post strong revenue growth for the quarter ended September as Q2 is a seasonally strong period. Most analysts see a constant currency revenue growth in the range of 3.1-3.6% and cross currency headwinds of 58-70 basis points (bps). One bps is one-hundredth of a percentage point. Analysts expect the Stater deal to aid revenue growth. “We expect full quarter consolidation of Stater to add 60 basis points to revenue growth. Revenue growth will be broad-based in our view," Kotak Institutional Equities said in a Q2 preview note. In March this year, Infosys acquired 75% stake in ABN AMRO Bank’s wholly-owned subsidiary, Stater to strengthen its mortgage servicing capabilities through digital platforms.
Performance in key geographies and industry segments
The US market accounts for 60% of Infosys’ total revenue. Clients in the banking and financial services industry, or BFSI, bring 32% of the business. In the previous quarter ended June, growth remained largely flat in both these segments. So, investors will keep a watch on management commentary on the BFSI vertical and the North American business, especially any commentary on the US-China trade war. General commentary on the demand environment and deal win momentum will also be monitored.
Growth in digital business
Infosys’ digital revenue accounted for 35.7% of total revenues during the first quarter ended June, a marginal improvement against 33.8% in the March quarter. Its digital revenue in April-June grew 8.1% sequentially to $1,119 million from $1,035 million in the previous quarter ended March. On a year-on-year basis, it grew 39.3% from $803 million in the quarter ended June 30, 2018. So, investors will closely watch out for growth in digital revenues. Analysts expect margin pressure to remain due to pricing pressure in legacy and investments in digital. Nomura expects Infosys to retain its margin guidance of 21-23% for the full year of FY20.
Attrition rates and retention measures
The attrition rate at Infosys stood at 23.4% in the April-June quarter, up from 20.4% in the previous quarter. This was much higher than competitor TCS’ attrition rate that stood at 11.5% in the June quarter. The management has taken various steps in terms of skilling its workforce and offering skill-based incentives, to address the rising attrition levels. Therefore, the company’s ability to retain talent and contain the attrition numbers will be closely watched.