Q2 earnings: Infosys margins may expand on revenue growth

Infosys is due to announce its earnings figures for the second quarter on October 12. For the first quarter ended June 2015, the company posted a consolidated net profit of Rs 3,030 crore, down 2.19 per cent, against Rs 3,098 crore in the sequential quarter ended March 2015. Net sales of the company jumped 7.03 per cent quarter-on-quarter (QoQ) to Rs 14,354 crore.

For the second quarter, market experts foresee revenue growth of over 6 per cent (in rupee terms) and net profit growth of over 12 per cent on a Quarter-on-Quarter basis (QoQ).

Historically, September quarter QoQ US dollar revenue growth tends to be a strong one for Indian IT services industry. For most companies, QoQ growth tends to be better than that of June quarter. Market experts expect a repeat this year too, by and large.

At one of the investor conferences, the company’s management stated that growth in the second quarter is unlikely to be more than that of first quarter. On the same Nirmal Bang Equities in a research report said, “We believe the management was referring to USD growth which will be impacted by cross-currency movement. We are factoring in a 4.1 per cent USD revenue growth QoQ to 2,349 mn. In reported terms, INR depreciation will inflate growth and we expect a growth of 6.4 per cent QoQ. EBIT margin of Infosys will improve by 233 basis points on QoQ basis and 24 basis points on YoY (year on year basis). We expect a profit growth of 12.5 per cent QoQ and 10.1 per cent YoY for the quarter ended September 2015, ”.

According to Bank of America-Merrill Lynch, Q2FY16 earnings season is likely to be a net favourable event for large-cap Indian IT stocks on the back of status-quo on demand outlook vs the previous quarter and tailwind to margin or earnings expectations from favourable forex movement. The global research firm believes that Infosys is well placed going into earnings season on likely benefit from healthy deal wins in the quarter.

Rakesh Shinde, AVP, research, Bonanza Portfolio, said, “We expect margins to get expanded by 80-100 bps due to higher revenue growth and rupee depreciation.”

Overall, market experts believe growth in IMS, ADMS need to be looked, these are the services lines in which Infosys as well as other Indian players are bidding aggressively to win large deals. Growth and deal wins in these service lines will be crucial from future revenue as well as margin standpoint. Management commentary on revenue productivity, greater use of automation in various projects will be eyed closely. Attrition and utilisation will also be closely watched as management has indicated in Q1 that both have rooms to improve. Also, outlook on demand from key verticals, geographies, client mining efforts will be closely watched.

Infosys shares were trading 1.55 per cent up at Rs 1149.95 in the afternoon trade.