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Infosys Q2 profit seen up 3.4%, Sikka’s strategy key: Poll

India’s second largest software services exporter  Infosys will kick off second quarter (July-September) earnings season on Friday. While the operating numbers will be closely watched, of more interest to the market will be the strategy of newly appointed CEO Vishal Sikka.

According to the average of estimates collated by CNBC-TV18, profit after tax is expected to increase 3.43 percent sequentially to Rs 2,985 crore from Rs 2,886 crore.

Rupee revenue may grow 4.2 percent quarter-on-quarter to Rs 13,307 crore and dollar revenue is seen rising 2.9 percent to USD 2,195 million as against 2 percent growth in previous quarter.

Analysts feel any failure by Sikka to spell a clear strategy could trigger a sell-off as the stock has run up sharply leading up to the results. The stock has risen 15 percent since June 12 (the day Sikka officially took charge). But year-to-date it has gained only 5 percent, while its rivals TCS ,  Tech Mahindra and  HCL Technologies  climbed 23-33 percent, and  Wipro  7 percent in the same period.

The second quarter is a seasonally strong quarter for the sector. Analysts expect a pick up in sequential growth of the company.

Earnings before interest and tax (EBIT) is likely to jump 6 percent on sequential basis to Rs 3,407 crore and margin may expand 46 basis points to 25.6 percent during the quarter on modest rupee appreciation and cost optimisation.

The expansion in margin may be driven by the absence of wage hike. However, this will be offset as Q1FY15 margins benefited by 110 basis points due to change in estimate of useful life of assets. Also higher investments and decline utilisation could impact margins negatively, feel experts.

Guidance

As far as its full year FY15 guidance is concerned, analysts believe that is likely to be maintained for now despite a likely hit due to cross currency.

Dollar revenue guidance for the current financial year stands at 7-9 percent, which was maintained in the previous quarter but the rupee revenues are expected to grow 5.6-7.6 percent (on conversion 1 USD = Rs 60).

According to the poll, to maintain this guidance, the company needs to deliver a 2.3-3.5 percent compounded quarterly growth rate over Q2 to Q4FY15.

Sikka’s strategy

Analysts expect a balanced calibrated approach from company’s CEO Vishal Sikka. “We expect Infosys to articulate its intent to increase its win-rates and market-share in bread-and-butter offerings (large deals, inframanagement, BPO, ADM) but also chart out a differentiated journey in digital, with Dr Sikka leading the charge. An incremental approach will not help Infosys break new ground,” said JPMorgan.

“If Infosys defines its goal as predominantly wanting to win greater share in bread-and-butter offerings (i.e. reviving the core), it would merely play catch-up with TCS. For a large company wishing to create something distinctive, some disruption is inevitable,” it added.

The company has so far maintained that a three-year turnaround strategy put in place by founder NRN Murthy. And this is likely to stay (cost-effectiveness, sales effectiveness and delivery effectiveness), feel analysts.

Of the three, the company took a number of measures to take out redundant costs. Now most of the cost rationalisation has been done already and that Infosys has a more streamlined cost structure today than 12-18 months back.

But there is still limited success on sales and delivery effectiveness.

On sales effectiveness, the company has taken several initiatives like hiring account managers for effective mining of its key/important accounts and hiring business school graduates.

On delivery effectiveness, it has carved out IMS (infrastructure management services) and digital as separate horizontals in order to encourage focus on these two high-growing services.

Capital allocation

Most analysts don’t expect Infosys to use its cash pile for buyback. They believe the company needs to augment its portfolio by doing mergers and acquisitions and that remains the best use of its cash.

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