Infosys’ first earnings announcement after the return of N R Narayana Murthy is expected to put the retired cofounder under a sharp spotlight as analysts seek clarity on milestones that could signal the company’s return to health.
Murthy, who was recalled by the board last month, may have the unenviable task of paring the growth forecast for India’s second largest software services exporter as cross-currency swings shave off gainsthe rupee’s depreciation against the dollar. The industry veteran has sought three years to “rebuild a desirable Infosys” but an anonymous ET poll of 15 brokerages shows that analysts would want to know sooner that the rebuilding is indeed taking roots.
Analysts said that they expect signs of revival and return of growth momentum in about three quarters. The majority of analysts said that they expect the software exporter to pare its growth guidance6-10% given at the beginning of the fiscal. That pales in comparison with Nasscom’s projection of 12-14%.
“Infosys guidance is likely to take centre-stage,” wrote Rumit Dugar and Udit Garg of Religare Institutional Research in a note to clients on earnings expectations. For the April-June quarter, Infosys’ revenue reported in dollars is expected to grow at a tepid pace of 1-1.5%, which is estimated to be well below that of Tata Consultancy Services, Cognizant and HCL Technologies but likely better than Wipro.
Given Murthy’s philosophy of predictable growth, there is also an expectation that Infosys may bring back the practice of giving earnings guidance, which it stopped last quarter. At least two analysts polled said they expected Infosys to reintroduce earnings guidancethe next quarter, if notthe current one.
Despite the currency depreciation, which is expected to trickle down to the bottomline, Infosys is expected to report a marginal fall in net profit as it absorbs the effects of an unexpected June wage hike. Falling pricing will also add to pressure on profitability, analysts said. Given that rivals such as Cognizant and TCS are capturing a larger share of the market, Infosys is unlikely to be able to maintain pricing levels, leading to erosion in profit margins.
While the expectations are high, it is not so much about the first quarter numbers, but about visibility into future growth. “NRN’s return implies that any disappointment in first quarter may be overlooked,” said Sandeep Muthangi, an analyst with IIFL. “What analysts will be watching out for is details on the roadmap and the specifics on the changes that Murthy is seeking to bring about.”
The ET poll showed that only a few analysts expect Infosys to return to industry leading growth before the next fiscal or the one after that. Accenture and Oracle performing below expectations has also sobered expectation levels among industry observers.
“Accenture’s weak consulting growth indicates that there is still no improvement in the discretionary spending environment, which is likely to hurt companiesInfosys more due to its relatively high exposure to discretionary segments,” Nomura analyst Pinku Pappan wrote in a recent note to clients.