Infosys might lower FY15 revenue forecast on Friday

Infosys Technologies, the country’s second largest information technology (IT) services company, might lower its revenue growth forecast (‘guidance’) for 2014-15 when it details the earnings for the October-December 2014 quarter (Q3 of FY15) on Friday.

Persistent cross-currency headwinds, coupled with seasonal weakness, are seen to be weighing on the performance. The Bengaluru-based company had earlier pegged revenue growth for FY15 at seven to nine per cent.

“Cross-currency movements will likely have a 150 basis points (bps) impact on revenue in Q3, of which 100 bps was factored in the guidance. This would imply a restated full year guidance of 6.75-8.75 per cent,” brokerage firm Motilal Oswal said in a pre-earnings note.

A majority of brokerages believe Infosys will trim its growth guidance. Some said it might opt for lowering the higher end of the targeted growth, which it is unlikely to meet.

With most large Indian IT services companies getting close to 70 per cent of their revenue from America and around 20 per cent from Europe, the fluctuation in currency leads to a major impact on performance.

During Q3, the euro, pound and Australian dollar depreciated close to six per cent, five per cent and 7.8 per cent, respectively, against the US dollar. The currency depreciation will affect US dollar revenue, as Indian IT services companies convert the other currency revenues into dollars.

“With cross-currency headwinds for consecutive quarters, we believe the dollar revenue growth in FY15 might settle at the lower end of the seven to nine per cent guidance range. We also believe the historical seasonality pattern (of April-September growth being significantly better than October-March) could be less pronounced this year for Infosys,” Credit Suisse said in a report.

In dollar terms, Infosys’ revenue during Q3 is estimated to grow 1.0-1.5 per cent sequentially. This is seen translating to around three per cent on a constant currency basis. Credit Suisse pegs Infosys’ sequential revenue growth in dollar terms at one per cent. Motilal Oswal and Kotak Institutional Equities see it around 1.2 per cent. On a constant currency basis, HDFC Securities pegs Infosys’ Q3 revenue growth at 2.7 per cent, while Kotak Institutional Equities pegs it at 2.8 per cent.

Amid currency volatility, most IT services companies are seen taking a hit on their margins during Q3. Analysts expect Infosys to be the least affected for this reason as against its peers, mainly due to its revenue mix. Credit Suisse estimates Infosys’ operating profit margins to contract by 50 bps sequentially during the quarter.

While the Street has factored in most of the developments likely to effect Infosys’ performance, analysts are likely to keep a keen eye on Chief Executive Officer Vishal Sikka’s comments on strategy. Investors are also likely to keep a close eye on Infosys’ employee attrition, close to all-time highs for several quarters. Employee utilisation, deal wins and comments on clients’ spending during 2015 will also be watched.

“Any update on the new CEO’s strategies, progress on management’s initiatives to address employee attrition, and account mining challenges will be the key things to watch,” Credit Suisse said. “Any quantification of the new strategies is likely, though, only in April.”