Infosys Q3 Results Preview: A Bleaker Quarter? De-growth Likely In CC Revenue, Wage Hikes May Impact Margins

Infosys Q3 Results Preview: The second largest IT firm in terms of market share, Infosys is likely to have a bleaker third quarter in FY24 owing to de-growth in constant-currency revenue, while wage hikes across all employees are expected to take a toll on EBIT margins. The bottom-line front of Infosys may also fall in the quarter, leading up to tweaking in FY24 guidance. Ahead of Q3FY23 earnings, Infosys' share price traded on a bearish note on Wednesday.

At the time of writing, Infosys shares were down by 1.3% to trade at Rs 1,509.45 apiece on BSE with a market cap of over Rs 6.26 lakh crore. The stock price traded near its intraday low of Rs 1,505.10 apiece.

Infosys will announce results for the third quarter ended December 31, 2023, on Thursday, January 11, 2024, around 3:45 p.m. Indian Standard Time (IST) (5:15 a.m. ET; 2:15 a.m. PST; 10:15 a.m. London time; 6:15 p.m. Singapore/Hong Kong time).

In the September 2023 quarter, Infosys posted a consolidated net profit of Rs 6,212 crore which is attributable to the owners of the company, registering a growth of 4.5% QoQ and 3.2% YoY.

Consolidated revenue stood at Rs 38,994 crore, while constant currency revenue came in at $4,718 million registering growth of 2.5% YoY and 2.3% QoQ. Operating margins also expanded sequentially by 0.4% to 21.2% compared to 20.8% in Q1FY24, however, contracted by 0.3% from 21.5% in Q2FY23.

In Q2, for the full-year FY24, Infosys trimmed its upper-end of constant currency revenue growth to 3.5% from the previous 2.5%. Overall, the company expects CC revenue growth to be in the range of 1-2.5% from earlier 1-3.5%. However, it maintained its EBIT margin guidance in the range of 20-22% growth.

What to expect from Infosys during Q3FY23?

The majority of experts are predicting de-growth in Infosys constant currency revenue in Q3FY23.

In its preview note, KR Choksey said, "We expect the revenue of Infosys Ltd to increase by 1% YoY and decrease by 0.7% sequentially. Delays in program kickoffs, extended deal closures and reduction in discretionary spending are the expected reasons behind this slower growth."

Also, DOLAT Capital is expecting QoQ de-growth of 1.1% in CC due to lower pass-through & higher furloughs.

Along similar lines, brokerage Equirus Securities said, "US$ sales are expected to decline by 1.5% (CC: 1.5% qoq dip) led by expected absence of certain one-time sales accounted in 2Q, expected lower pass through sales (from a very elevated levels of 2Q despite pass through sales remains high in 3Q generally) and furloughs."

Furthermore, EBIT, margins and PAT may also take a hit.

In Equirus's view, "EBIT margins are expected to dip by 68bps qoq led by expected wage hikes for all eligible employees eff. 3Q, absence of one time sales in 2Q to be partly compensated by expected lower pass-through sales and currency benefits."

Equirus also expects Infosys to fine-tune its FY24E CC US$ Sales growth guidance to 1-2% from current 1.0-2.5% with a reiteration of EBIT margin guidance of 20-22%. It added, "We expect every order book for large deals to decline and normalise qoq from high base of 2Q."

Meanwhile, DOLAT's note said, "OPM to contract by 114bps QoQ due to wage hike."

KR's note added, "EBIT is expected to reduce by 4.5% YoY and by 4.8% QoQ whereas EBIT margins are expected to reduce by 117 bps YoY and by 87 bps QoQ due to furloughs and wage hikes. Net profit is expected to reduce by 4.9% YoY but increase by 0.8% sequentially."

Among key parameters to watch in Infosys Q3 on January 11, as per KR Choksey some of them are -- 1) Large deal wins 2) Growth in AI and GenAI 3) Management departures 4) TCV conversion.

While DOLAT highlighted key moniterables -- 1) Expect FY24 guidance (CC Growth 1%-2%, OPM 20%-21%), 2) Commentary on recent deal cancellation, Discretionary spend outlook & senior leadership exits.

Key things to look for as per Equirus are -- Demand outlook in 4QFY24/CY24E, deal pipeline especially for large/mega size deals, client decision making, any major supplyside issues/attrition trends (incl. leadership attrition update if any) and pricing trends, details on FY24E/4QFY24E guidance.

In numbers, KR Choksey expects revenue to be at Rs 38,704.2 crore in Q3FY23 for Infosys, up by 1% YoY but down by 0.7% QoQ. Also, EBIT is seen at Rs 7,874 crore, declining by 4.5% YoY and 4.8% QoQ. PAT is factored at 6,263.7 crore, down by 4.9% YoY and marginally up by 0.8% sequentially. EBIT margin is expected to contract by 117 bps YoY and 87 bps QoQ to 20.34%.

In dollar terms, DOLAT expects Infosys revenue to be at $4,671 million, down by 1% QoQ and flat by 0.3% YoY. Equirus has factored CC revenue of $4,647 million, down by 1.5% QoQ and 0.2% YoY.

On the stock price, DOLAT has recommended 'SELL' for a target price of Rs 3,510. However, KR Choksey has recommended 'Accumulate' for target price of Rs 1,508.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.