Will attrition affect Infosys December quarter revenue?

Indian tech consultancy Infosys [INFY] is expected to report a 15.3% hike in sales year-over-year but earnings growth is expected to remain flattish when it reports its third-quarter figures on 12 January.

Analysts at Zacks forecast that the group will record sales of $4.08bn for the quarter, up from $3.52bn in the same period last year.

AI demand

According to Zacks, large deal wins and Infosys’s focus on agile digital and artificial intelligence-driven core services will be major tailwinds for the group. It will also be buffeted by strong demand for its cloud services, products connected to the Internet of Things, cybersecurity, data and analytics.

Despite this, its is likely to record a slight slowdown on its second-quarter performance, which rose 20.7% in revenue year-over-year and 13% in its basic earnings per share to $0.17.

“As we witness a strong market opportunity with global enterprises rapidly accelerating their digital journeys, our sustained investments in expanding capabilities, including the differentiated cloud play, Infosys Cobalt, has uniquely positioned us to continue serving our clients effectively,” said Salil Parekh (pictured above), chief executive officer and managing director at the second quarter announcement.

This time round, its EPS is expected to remain flat at $0.18 according to CNN Money.

“Rising anti-outsourcing sentiments in certain countries, high subcontractor costs as well as its compensation revision with higher variable pay and incentives have been weighing on margins,” Zacks added.

These concerns, as well as its lofty valuation of $102bn and potentially higher interest rates in 2022 which will inflated the compnay’s debt, have left the previously surging Infosys share price losing momentum.

Infosys share price dip

The Infosys share price rose 52.8% between the end of January 2021 and the end of the year. Since the start of 2022, however, its price has dropped 4.4% to the close on 7 January.

"IT stocks have run up way ahead of expectations... Some profit booking appears to be taking place now as market participants await the coming earnings season. Most IT stocks have overheated in the overall market rally in the past 18 months or so," AK Prabhakar, head of research at IDBI Capital Markets, told CNBCTV18.com.

Another reason for the drop is the fear that some companies, particularly those in sectors hard hit by the coronavirus pandemic such as aviation or retail, could look to cut their IT budgets this year and slow down any shift to digital or innovation drives.

Still, clear market fundamentals remain. "IT stocks seem extremely well placed to benefit from the digitisation and automation mega-trends over the next five years. Also, it is not just the IT behemoths but also the IT mid-caps and small-caps that have enormous headroom for growth," Tanushree Banerjee, co-head of research at Equitymaster, also told CNBCTV18.com.

The analysts’ views

According to Market Screener, analysts have a mean consensus of ‘buy’ on the stock, but remain cautious about its target price. BMO Capital has a price of $25, with concerns over its staff attrition rates. Susquehanna has a $22 price target, given worries over the group’s valuation.

James Brumley, writing in theMotley Fool, remains a fan, describing the group as having incredible traction. “Not once in the past 20 years has Infosys revenue fallen from one year to the next, and only once — in 2013 — has operating income tumbled year over year,” Brumley wrote. “After accelerating this year following 2020's headwind, the analyst community is calling for next year's 11% sales growth to drive an identical 11% increase in per-share earnings. It's a growth pace one typically doesn't see for an organisation that seemingly isn't swayed by any environmental factors.”

Blue-chip support

Infosys is also winning the hearts of some major blue-chip clients as they ramp up their digital journeys.

One example is a digital partnership agreement extension with Tennis Australia where Infosys uses big data and virtual reality to improve spectator experience at the Australian Open. Another recent win is becoming the digital innovation partner of the Financial Times.

It has also sealed a strategic collaboration with Royal Dutch Shell [RDSB] to utilise AI and help its energy customers optimise warehouse inventory levels.

“While there are near term headwinds from the supply-side, we expect them to normalise over the next couple of quarters. We expect Infosys to be a key beneficiary of acceleration in IT spends,” said analysts at Motilal Oswal Financial Services, as reported by Business Standard.

Any hard evidence of this increased demand as companies see some clear route out of the pandemic should help put Infosys shares back on track.