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Despite growth forecast on topline, margin pressure likely

IT services major Infosys may increase its revenue guidance further for this financial year after doing so in the last quarter. Most brokerage firms see strong set of Q2 earnings numbers by the company, which is scheduled to be released on October 13 (Wednesday).

Despite growth forecast on topline, margin pressure likely
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Despite growth forecast on topline, margin pressure likely

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- Analysts expect Infosys to raise its annual revenue guidance further from present 14-16%

- Wipro is likely to post strong revenue growth owing to revenue flow from Capco

- However, both the IT firms may see contraction in operating margin on high wage cost

- Commentary on attrition and hiring will be keenly watched by investors

Bengaluru: IT services major Infosys may increase its revenue guidance further for this financial year after doing so in the last quarter. Most brokerage firms see strong set of Q2 earnings numbers by the company, which is scheduled to be released on October 13 (Wednesday).

In the first quarter ended June, the Bengaluru-headquartered firm had raised its annual revenue guidance to 14-16 per cent from 12-14 per cent earlier.

Infosys is likely to see higher contribution from Daimler deal, broad-based growth across verticals and robust pipeline of deals. "Deal signings are expected to remain healthy, although deal TCVs in Q2 could be muted given higher contribution from smaller deal sizes (includes deals with TCV of $50mn+)," brokerage firm Sharekhan said in an earnings preview report.

Most analysts expect around 20 per cent year-on-year (YoY) growth in Infosys' revenues during the second quarter of FY22.

In US dollar terms, the IT major is likely to grow 5.6 per cent in sequential term whereas constant currency growth in revenues is seen around six per cent for the September quarter.

However, analysts expect the IT sector bellwether's consolidated operating margins to shrink around 100 basis points sequentially owing to impact of wage hikes, currency fluctuations and deal transition costs.

Meanwhile, supply-side challenges could continue to hurt the company's operating margins. "We expect Infosys to post margin contraction of 90 basis points QoQ due to attrition related challenges, wage hikes and deal transition costs. However, some part of the hike is likely to be offset by strong volume growth and better cost control and efficient execution. For Infosys, we would keenly watch out for the movement in attrition, a key variable in our view," Edelweiss Research said in a note. Another IT services major Wipro will also announce its second quarter results on Wednesday. The company, which has seen good growth momentum in the last two quarters, is likely to sustain it this quarter.

Analysts are penciling a revenue growth projection ranging between 25-29 per cent on a year-on-year (YoY) basis. Revenue growth will be driven by the ramp-up of large deals along with contribution from Capco and Ampion acquisitions.

"One-month revenue of Capco and possible revenues from Ampion acquisition could translate to 3.2 per cent organic QoQ CC (constant currency) growth," HSBC said in a note. The global brokerage firm expects Wipro to provide strong revenue growth projections for third quarter.

Most analysts are expecting contraction in operating margins in Q2 for Wipro. "We estimate IT services margins will have contracted 120bps QoQ mainly owing to the impact of wage hikes," HSBC said in a note. The commentary on attrition and hiring by Wipro management will be keenly watched by investors on Wednesday.

Debasis Mohapatra
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