Infosys Q2 preview: Margins likely to improve, PAT may witness double-digit growth YoY

Infosys will be in focus on Thursday ahead of its Q2 results. The company will also announce a buyback plan and interim dividend for FY23 tomorrow. Infosys peers TCS, Wipro, and HCL Tech have already presented their earnings and it has been a broadly mixed bag. In Q2FY23, Infosys is likely to continue its revenue growth momentum while margins are expected to improve as wage hike shocks are behind now. However, Infosys' attrition rate is expected to shoot further up. Growth guidance along with commentary on large deals among key monitorable.

On BSE, Infosys shares closed at ₹1,428.85 apiece on Wednesday marginally up from the previous day's closing of ₹1,423.90 apiece. Currently, the company's market cap is around ₹6,01,235.44 crore.

On October 13, Infosys is likely to announce share buyback and interim dividends.

In its regulatory filing earlier this week, Infosys said, "the Board of the Company will consider a proposal for buyback of fully paid-up equity shares of the Company at its meeting to be held on October 13, 2022."

Last month, Infosys announced that the board will consider the first interim dividend for FY23.

In the first quarter of FY23, Infosys delivered a robust performance. Consolidated net profit jumped by 3.2% yoy to ₹5,360 crore, while revenue from operations stood at ₹34,470 crore higher by 23.6% yoy. Also, the company's year-on-year growth stood at 21.4%, and sequential growth at 5.5% in constant currency. It recorded year-on-year growth in double digits across all business segments in constant currency terms.

What to expect from Infosys Q2 earnings?

In their Q2 preview report, Sameer Pardikar and Sujay Chavan Research Analysts at ICICI Direct on Infosys said, "Revenue growth momentum is expected to continue on strong deal execution while margins are expected to improve sequentially as wage hike is behind now. Infosys is expected to register 5% QoQ growth in CC led by continued momentum from financial services, retail, communication, energy, and manufacturing, despite it witnessing weakness in some pockets of BFSI and Retail. Cross currency headwinds of 150 bps would lead to 3.5% QoQ growth in dollar term."

"Rupee revenues are expected to increase 6.5% QoQ aided by rupee depreciation," the duo's note added.

Further, the analysts note said, "We factor in EBIT margin expansion of only 40 bps QoQ despite wage hike impact already taken in Q1, due to continued high attrition which is expected to increase backfilling costs and continued higher subcontractor costs which likely mitigate few of the tailwinds in terms utilisation improvement, pyramid optimisation etc. We expect PAT to increase ~11.1% QoQ."

Any change in revenue growth guidance of 14-16% in CC for FY23E and 21-23% EBIT margin band will be keenly watched.

ICICI Direct analysts expect Infosys revenue at ₹36,704.3 crore up by 24% yoy and 6.5% qoq. EBITDA is seen at ₹8,561.8 crore higher by 9.3% yoy and 8.9% qoq. PAT is factored at ₹5,954.9 crore up by 9.8% yoy and 11.1% qoq.

Meanwhile, in their Q2 preview report, Anjali Verma Research Analyst and Ravi Kumar Research Associate at Phillip Capital said, "We expect strong CC revenue growth of +5.3% (+3.8% qoq in USD) on strong momentum and ramp up of past deals. Margins are expected to expand by +30bps qoq - due to absence of salary hikes, USD/INR dep and operational efficiencies offset by likely lower utilization, senior management salary hikes and travel expenses."

Further, Phillip Capital analysts note said, "We expect Infosys to retain 14-16% CC revenue growth and 21-23% EBIT margin guidance. Watch out for: FY23 guidance update, if Macros are impacting demand, Deal TCVs & pipeline, Supply side pressures."

While analysts at Motilal Oswal in their Q2 preview report stated that expect good demand commentary from Infosys with good deal conversions. In CC terms, Infosys should deliver a USD revenue growth of 4.3% QoQ, although adverse cross-currency movements will drag reported growth."

Also, Motilal's note said that expect weaker-than-expected margins as supply-side challenges continue to remain elevated. Commentary on deal wins and margins will be key monitorables.

Motilal and ICICI Direct have given a buy rating on Infosys stock with a target price of ₹1,640 and ₹1,760 apiece respectively.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.