Infosys Q2 earnings: Five things to watch out for

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Bengaluru: It’s a given that Infosys Ltd will scale back its full-year growth guidance on Friday, when the Bengaluru-based company announces its second quarter earnings for July-September period.

But we will come to that in a bit.

Firstly, is preparing full-year guidance at Infosys becoming a joke? Or does Infosys face a smoker’s dilemma when it comes to making growth projections? It ain’t easy for smokers to stub out their habit. Similarly, under chief executive officer (CEO), Vishal Sikka, Infosys finds it equally arduous to get right its full-year guidance (the company stopped giving quarterly guidance a few years back).

What else explains this that save for the Sikka’s first full quarter as the CEO in October-December period of 2014, Infosys has tweaked its annual guidance at every possible quarterly meet (Infosys sets out its full-year target in April every year, and the management could not have changed its guidance then).

It’s not just the constant tweaking of outlook which is an irritant (Both Cognizant Technology Solutions Corp. and Accenture Plc. too, have revised their guidance more than once).

Rather, what is particularly disconcerting is Infosys’s yo-yo-ing in growth trajectory. Sample this: In April 2015, Infosys set out its dollar revenue to be between 6.2% and 8.2%. Three months later in July, management upped the range to 7.2-9.2%, only to return a quarter later to nudge it lower to 6.4-8.4%. In January, the management pushed it higher, again, to 8.9-9.3%. Eventually, Infosys ended 2015-16 with a 9.1% dollar revenue growth. Thank heavens for Infosys managing to achieve the mid-point of the guidance, even though it was embarrassing to see the management take four shots to manage this.

During this time, both Cognizant and Accenture, only upped, gradually, their growth projections (Wipro Ltd only gives quarterly outlook while Tata Consultancy Services Ltd does not give any quarterly or yearly guidance).

Again, in April this year, Infosys estimated dollar revenue to grow at-best 13.8% this year, which the management again lowered in July to at-best 12.3%.

Now, Infosys’s second straight scaling back of guidance has thrown more questions. How deep will this latest round of cut in outlook? Will this be the last tweak for the year or will the management leave room for another change in January, when third quarter results are announced? Importantly, is Infosys staring at growing at a slower pace than last year? Finally, will Infosys’s lower growth estimate be higher than Cognizant’s projected 8.5-9.5% growth in calendar year 2016?

Going by the management’s past record, it will be greedy to expect that it’s done with any revision, and the company will certainly take a relook at its outlook in January.

This needs to be corrected. It’s time now that Infosys starts to articulate its growth projection better before its annual guidance process puffs out as smoke. Remember, these developments hit investors on results day in July—Infosys shares plummet 8.81% on Black Friday for investors, eroding Rs.23,796.34 crore of investor wealth.

With this as backdrop, Mint brings to you five things to watch out for when Infosys declares its earnings on 14 October:

Revenue forecast: Brokerage firm BNP Paribas sees Infosys recording 2.2% sequential increase in dollar revenue (2.6% in constant currency terms) at $2.56 billion for the July-September period. Management is further expected to narrow its full-year dollar revenue growth to 8.0-9.0%. This could send alarm bells ringing for investors as this suggests that Sikka’s new measures to turnaround the company are taking longer than earlier expected. Finally, management commentary for the October-December period will be crucial as the second half of the year sees little or no growth for Indian IT firms.

Senior management exits and steps management is taking to arrest attrition: A bigger headache for Sikka in this financial year is turning out to the departure among senior management ranks. More exits among other senior employees (which the company calls as title holders) is further leading to loss of momentum, and poor execution in completing work.

Poor execution was one reason Sikka conceded behind company’s poor 2.2% sequential dollar growth (1.7% in constant currency terms) during the April quarter.

Update on large deal wins and demand from large customers are central to Sikka’s target of becoming $20 billion by March 2021: Since Sikka took over as boss, Infosys has improved its large deal wins in a quarter ($809 million in April-June period). Still, this remains short of management’s stated goal of more than a $1 billion.

Additionally, Infosys continues to generate more business from its top five and top ten clients. Although Sikka may not tweak company’s target of becoming a $20 billion firm by March 2021 for now, Infosys needs to further improve on both these metrics if the management expects to achieve its targeted goals.

Key metrics: Infosys wants to increase its productivity per employee and boost its profitability by 4% to 30%. However, since September 2014, revenue per employee has been declining. Its profitability, too, has remained under pressure as it has been the most aggressive in pricing, while trying to bag large deals.

Sikka did mention that one of the priorities for the management this year is to reverse this decline in revenue per employee. Infosys’s current FTE (revenue per employee deployed on projects) totaled $50,900 at the end of June quarter, and its time Infosys starts showing improvement on this metric.

Add Infosys Consulting as the third ailing weak areas, behind Infosys BPO and Edgeverve: One sore point in Infosys’s journey since September 2014 has been the underperformance of two of its units, namely EdgeVerve and Infosys BPO. Together, both accounted for a little over 13% of its $9.5 billion revenue last year.

Although Sikka has said the management has arrested loss of business in consulting practice in the second quarter, the fact is that the company is still not able to monetise well Sikka’s novel measures like AiKiDo to drive growth. All three units have new leaders, and hence management commentary on the performance and road ahead for each of the three units will be eyed