Infosys Q3 preview: Large deals, acquisitions to drive PAT by up to 16% YoY

Infosys Q3 preview: Lead by the ramp-up of Vanguard deal, incremental revenue contribution from acquisitions and strong growth momentum in key verticals, IT bellwether Infosys may post a 9-10 per cent year-on-year (YoY) growth in its revenue (in rupee terms) for the quarter ended December 2020 (Q3FY21). The revenue could rise between 2.5-3.5 per cent quarter-on-quarter (QoQ) in constant currency (cc) terms and 3-4 per cent in dollar revenue terms.

The Bengaluru-based firm, which is slated to release its Q3 numbers on Wednesday, January 13, may post record deal TCVs for the quarter due to the Daimler deal. The expectations of such a strong performance are visible in the stock price movement. Shares of Infosys have risen 24.55 per cent for the three months ended December 2020 and 9.58 per cent year-to-date (YTD), data available with ACE equity showed. This is against a 21.55 per cent rise in Nifty IT index and 24.30 per cent jump in Nifty 50 during the October-December quarter.

Some analysts even say the company may revise its FY21 revenue guidance upwards. Sharekhan, for instance, expects Infosys to increase revenue guidance for FY21 to 2.5-3.5 per cent from 2-3 per cent earlier.

That apart, investors are likely to watch out for margins of captive takeover deals, wage hikes, attrition rate, traction in digital technologies, demand outlook, especially BFSI, hi-tech, and retail verticals and pricing environment.

Antique Stock Broking foresees a 10.1 per cent YoY (3.5 per cent QoQ) jump in revenue to Rs 25,420.3 crore in Q3FY21. “We forecast constant currency revenue to grow at 3.6 per cent QoQ in 3QFY21 and 4 per cent QoQ in dollar terms to $3,444 million with 40bps tailwind from cross currency. Further, we expect the large deal pipeline to remain strong as clients look at accelerating digital transformation programs and continuing their focus on automation and cost efficiency,” the brokerage said in an earnings preview note.

At the lower end of the spectrum, Phillip Capital projects a 9 per cent YoY (2.5 per cent QoQ) jump in revenue at Rs 2,5178.8 crore. “We expect dollar revenue growth of 3 per cent with the positive cross-currency impact of 50 bps (cc growth of 2.5 per cent). Growth in revenue would be led by the ramp-up of Vanguard deal and acquisitions,” the brokerage said.

Meanwhile, analysts at Sharekhan see a 9.2 per cent YoY (2.7 per cent QoQ) growth in revenue to Rs 25,227 crore. Infosys had posted a revenue of Rs 23,092 crore in the same quarter last year and Rs 24,570 crore in the preceding quarter of FY21.

Profit projections

Most brokerages expect Infosys to post double-digit jump in the net profit for Q3FY21 in the range of 12-16 per cent on a YoY basis. In QoQ terms, the profit could rise up to 7 per cent, believe analysts. Infosys had posted a profit of Rs 4,457 crore in Q3FY20 and Rs 4,845 crore in Q3FY21.

Phillip Capital and ICICI Direct project around 15-16 per cent YoY (6.5 per cent QoQ and 5.7 per cent QoQ, respectively) jump in net profit up to at Rs 5,157.6 crore.

“Net profit is expected to increase 15 per cent YoY due to healthy operating margins (led by Covid 19 related savings, operational efficiencies and rupee depreciation) and absence of investments made in the previous year,” ICICI Direct said in an earnings preview note for the IT sector.

Impact on margins

Most analysts expect Infosys to post a contraction in EBIT (earnings before interest and tax) margins. Sharekhan forecasts EBIT margin contraction of 61 bps QoQ, owing to transition expenses of a large deal. Those at Phillip Capital see margins to decline by 40 bps QoQ to 25 per cent on Vanguard deal ramp up, partly offset by higher utilization and offshore mix. EBIT margins stood at 21.9 per cent at the end of December quarter 2019 and at 25.3 per cent at the end of September quarter 2020.

Conversely, ICICI Direct believes despite headwind of rupee appreciation, EBIT margins may remain stable at 25.3 per cent, mainly led by cost rationalisation, lower travel and facility cost.

Analysts at Sharekhan, meanwhile, don’t see a revision in margin guidance for FY21 and expect Infosys to continue to maintain the same at 23-24 per cent.

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