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Infosys results: Lower expectation for Dec quarter

January 09, 2014 09:36 IST

Photographs: Courtesy, Facebook Itika Sharma Punit in Bangalore

Comments awaited on top exits, management rejig, products business demerger, apart from FY14 revenue forecast.

While Infosys’ October-December 2013 (third quarter of FY14) earnings are expected to be muted due to seasonal weakness, there is great interest from all corners in the announcement, to be made on Friday.

Observers are keenly looking forward to the Bangalore-based information technology (IT) giant’s comments on the demand environment, near-term outlook and the recent churn in top management. Most analysts also expect the country’s second largest IT services company to raise its revenue forecast for FY14.

According to estimates of brokerage companies, Infy is likely to post a tepid one or two per cent sequential growth in revenue for Q3 of FY14. This is mainly due to low volume growth, amid Christmas and New Year holidays and furloughs in the key markets of America and Britain.

“A seasonally weak quarter induces us to forecast moderate quarter-on-quarter growth of 2.2-3.8 per cent for the top four IT players in Q3,” said Edelweiss Securities in a note.

“However, we expect management commentaries to be positive on the demand outlook, owing to increased visibility in US markets and higher offshoring from Europe.”

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Infosys results: Lower expectation for Dec quarter

Photographs: Reuters

Infosys is widely expected to throw up some surprise on margins. It has undertaken several cost-cutting measures in recent months. Most analysts expect the margins to expand by 100-130 basis points sequentially.

The company is also expected to cheer investors by raising its revenue forecast (‘guidance’) for FY14 to “at least” 11.5 per cent from the current nine to 10 per cent, many brokerages said. Analysts said the company would raise its full-year guidance even if it assumed a muted fourth quarter.

Additionally, any positive comments on demand are likely to bode well for the entire IT sector, analysts said. In October, while detailing the financial results for July-September 2013, Infosys’ chief executive officer, S D Shibulal, had said it was seeing some rise in demand; also, discretionary spending was picking up. However, at that time, most analysts had said the company must have another quarter of sustained growth in demand before terming it a trend.

“We expect large Indian IT players to point to a healthy demand environment, timely closure of IT budgets and healthy pace of client decision-making,” said brokerage firm JPMorgan, in a report. “Available indicators suggest CY14 (calendar year) will likely be a year of consolidation, with a decent probability of a mild pick-up relative to CY13.”

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Infosys results: Lower expectation for Dec quarter

Image: Infosys' Jaipur Campus.
Photographs: Courtesy, Infosys

Infy’s comments on any impact due to the recent top-level exits and the ensuing personnel churn is likely to be closely watched by investors. “The company will have to clearly communicate and deliver to assuage concerns of business impact from senior-level exits,” said Kotak Securities.

After the return of co-founder N R Narayana Murthy as executive chairman, the company has seen a number of seniors quitting. During Q3, the company saw resignations of former chief financial officer and board member V Balakrishnan, and Infosys Labs’ head, S Goparaju, among others.

Earlier this month, in a relatively unexpected move, the company announced appointment of B G Srinivas and U B Pravin Rao as presidents. Additionally, Infosys said it’d decided to dismantle its executive council (EC), a top decision-making body, with effect from April this year. This seemed a clear signal that those being considered for the CEO’s post after Shibulal’s retirement in 2015 had now been limited to two.

“We would like to hear the logic for this (appointment of presidents and dismantling of the EC),” JPMorgan said. “We would watch for commentary on organisation structure, senior management attrition and top-management changes.”

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Infosys results: Lower expectation for Dec quarter

Image: Infosys' Chandigarh campus.
Photographs: Courtesy, Infosys

Infy is also likely to announce the long-speculated de-merger of its products and platforms business into a separate arm, Edge Works, when it announces the earnings on Friday, say sources. Products and platforms account for 5.5 per cent of overall revenue.

What to expect from Infosys

Muted growth for seasonally weak Q3

Margin improvement on cost cutting measures

Upward revision in FY14 revenue growth forecast

Clarity on products & platforms business de-merger

Remarks on demand, discretionary spends

Comments on top-level exits, organisational rejig

Clarity on any further restructuring

Source: source