BENGALURU : The October-December quarter was challenging for Infosys Ltd as two whistleblower letters surfaced, accusing its chief executive officer Salil Parekh and chief financial officer Nilanjan Roy of accounting malpractices. When the first letter became public on 22 October, the company’s shares tumbled as much as 16%. Amid all this, the company’s leadership had a tough time building confidence among clients and investors. The challenge might have been heightened by the fact Q3 is a seasonally weak quarter for IT companies due to holidays and furloughs. It will therefore be interesting to observe if the leadership has been able to sail through the turbulent waters and return to safe harbour.

Mint highlights five things to watch for in Infosys Q3 results that will be declared on 10 January.

Revenue growth and guidance for FY20

Most analysts expect the company to either raise its revenue guidance or narrow down on the range. “We expect revenue guidance to be increased to 9-11% versus 9-10% earlier," IDBI Capital said in a pre-earnings note. ICICI Securities said it expects Infosys to narrow down its FY20 revenue growth guidance to 9.5-10% in constant currency terms from 9-10% last quarter. “They are currently projecting growth near the high end at 10% for FY20," the brokerage firm said in a note. In terms of quarterly revenue, there is likely to be growth aided by large deals wins. “We forecast revenue in constant currency to grow by 1.4% QoQ despite of the seasonal weakness aided by ramp-up of large deals. We factor a cross-currency tailwind of about 40 basis points," IDBI Capital said. ICICI Securities expects Infosys’ revenue in dollar terms to increase by 0.8% quarter-on-quarter, with cross currency expected to be a tailwind of 25 basis points sequentially. “Business transfer of Eishtec in Ireland is also likely to contribute to revenues modestly." Infosys acquired Ireland-based contact centre in May last year for an undisclosed amount.

Commentary on whistleblower complaints

Investors and analysts will closely watch the management’s commentary on the progress or outcome of investigations into whistleblower complaints, which the media first reported on 22 October. The company’s chairman Nandan Nilekani had subsequently issued a statement acknowledging that one member of the company’s board had received two anonymous complaints on 30 September – one dated 20 September titled “Disturbing unethical practices" and the second undated with the title “Whistleblower Complaint." After that Infosys said the matter was under investigation. But the fact that it was the media and not the company that first reported the matter aggravated the issue.

Performance of BFSI, key industry segments

Growth in banking, financial services and insurance (BFSI) segments will be closely monitored as clients in the BFSI sector contribute close to 32% of Infosys’ revenue. For the second quarter ended September, BFSI revenues grew 10.3% year-on-year in constant currency terms but a lot of it was including the impact of the Stater acquisition. As a vertical, BFSI is expected to remain soft. “With continued challenges in the capital markets segment and large banks in US/Europe and heightened volatility in the retail vertical, we clearly expect revenue growth to decelerate in FY21 to about 7.5% in constant currency terms for our large cap coverage," ICICI Securities said in a note dated 15 December. Apart from this, the general commentary on demand environment in other key sectors and deal win momentum will also be monitored. “Discretionary IT spends in key verticals like BFSI and retail will likely remain subdued over the next year due to the waning impact of US tax reforms and the policy uncertainty in the US in light of impending elections," Motilal Oswal said in a note.

Growth in digital business

Infosys’ digital business accounted for 38.3% of the total revenue during the second quarter ended September, some improvement against 35.7% in the June quarter. Its digital revenue in July-September grew 10% sequentially to $1,230 million from $1,119 million in the quarter ended June. On a year-on-year basis, it grew 36% from $905 million in the quarter ended September 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.

Attrition rates and retention measures

The attrition rate at Infosys stood at 21.7% in the second quarter, an improvement from the first quarter attrition rate at 23.4%. However, this still is much higher than that of its closest competitor Tata Consultancy Services (TCS) which reported an attrition rate of 11.6% in the second quarter. The company’s 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 top talent and contain attrition will be closely watched.

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