The first quarter earnings season will gain momentum with technology bellwether Infosys announcing its first quarter (April-June) numbers on Tuesday. The results, which come amidst economic uncertainties in Europe and margin pressures back home, will set the tone for the overall IT sector performance this quarter.
Infosys had disappointed the street in the fourth quarter with earnings and rupee guidance for the current fiscal well below what analysts had expected. Also, the unexpected resignation of TV Mohandas Pai, HR head and a long-serving member of the company, sparked speculation of a rift in the senior leadership team.
The stock has been under pressure since then, shedding 8%, compared with a 6% decline in the CNX IT Index. The market therefore will be keenly glued to the developments over at the Bangalore-based company, especially after better than expected results by overseas rivals Accenture and Oracle.
During the quarter ICICI’s KV Kamath was named the Chairman at Infosys. He will replace founder and current chairman NR Narayana Murthy who will retire on August 20.
Most Indian software services providers, including Infosys, are expected to report better earnings for the first quarter as demand is likely to be strong despite macro-economic worries. Revenue growth is likely to be "healthy" 20% year-on-year in April-June.
Infosys' margins will be under pressure due to the wage hike it implemented in the quarter. The company raised wages by 10-12% for offshore employees (people working in Infy locations in India) and 2-3% for onsite employees (people working at client locations). Pricing is also likely to be flattish (up about 1%) in the quarter.
"Infosys had guided to a 400 bps sequential decline in margins in Q1 FY12 due to 260 bps quarter-on-quarter decline due to wage hikes, a 70 bps q-o-q decline due to rupee appreciation and a 70 bps q-o-q decline due to higher visa costs. Management has commented that it has been unable to significantly improve utilisation due to the unevenness of demand and the mismatch of skill-sets between demand and supply," according to Manish Nigam and Sagar Rastogi of Credit Suisse.
The rupee, however, has depreciated 0.5% sequentially in April-June, and this Edelweiss Securities says will limit the margin decline to 200-250 bps. Infosys is also expected to raise its full year guidance.
"We expect Infosys to guide for a 5-5.5% sequential revenue growth for Q2 FY12. We expect the EPS guidance for FY12 to be revised upward to around Rs130-131 from Rs126.05-128.21 earlier," says brokerage Sharekhan.
The growth this fiscal, however, is still expected to lag some of its peers. Credit Suisse expects Infosys' EPS (earnings per share) and revenue growth to be around 15% and 24% respectively, while smaller HCL Technologies , for instance, is expected to report 27% topline growth and 45% EPS growth for the full year.
"Change in FY12 guidance and assumptions, growth momentum in non-BFSI (banking and financial services), Europe and discretionary spend, pricing comments, supply-side pressures and impact on attrition/margins hereon," will be the key factors to watch out for according to ICICI Securities.
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