Infosys Q1 results: Brokerages see 2-3% sequential growth in IT major's revenue

Brokerage firms have projected a modest 2-3% sequential growth in Infosys’ Q1FY15 revenue, saying the company may have to absorb the impact of salary hikes, an appreciating rupee and fresh visa costs. Infosys will announce its first quarter earnings on July 11.

At the Q4FY14 results call, Infosys CFO Rajiv Bansal had said, “The increase in salaries, promotions and investments in new visas will impact first quarter margins by approximately 250-300 basis points (bps).” Operating profit margin (OPM) at the end of fourth quarter stood at 25.5%. It will be interesting to note where Infosys stands with regard to OPM in Q1.

The likely modest revenue growth comes at a time when there is an uptick in discretionary spend on technology, which forms a significant component of Infosys's revenue.

Kotak Institutional Equities in its report said, “We expect Infosys to report 2.3% sequential revenue growth with 1.8% growth in constant currency terms. Infosys will benefit from the seasonal improvement in business as well, but the spillover of some of the challenges it faced in 4QFY14 will mean it will trail peers in terms of growth. We expect margins to decline 210 bps on account of rupee appreciation, wage hikes and visa costs.”

Infosys has guided for annual revenue growth of 7-9% in US dollar terms for FY15, which is lower than the 11.5% it recorded in FY14. It is very unlikely the IT major will change its current guidance, brokerage houses have said.

The demand environment is also improving for the Indian IT services industry. Morgan Stanley, in its preview of first quarter results, said, “Management commentary around demand environment and deal pipeline has remained constructive for many India IT vendors. We believe an improved pipeline and continued conversions should reflect in improving revenue growth trend for companies over coming quarters.”

Nomura in its report said, “The key to watch would be management strategy on increased investments for growth versus focus on margin improvements.”

There are other indicators the market will be watching closely. JP Morgan said, “The indication of any change in Infosys’ strategic direction is unlikely as it is in the midst of CEO transition. The leading indicators of improvement at Infosys include moderation in attrition, a palpable pick-up in net hiring numbers, increase in sales and marketing investment and better client progression metrics.”

At the end of the fourth quarter of FY14, Infosys reported revenue of $2.1 billion, which was flattish sequentially while net profit grew 5.2% to $487 million. In rupee terms, revenue was down 1.2% at R12,875 crore while net profit grew 4.1% to R2,992 crore.