Shares of Infosys, a leading information technology (IT) giant, fell by up to 4.5%, hitting an intraday low of ₹1,880.80 on Friday, October 18, 2024. The decline followed the company’s announcement of revised revenue guidance for the financial year 2024-25 (FY25), which now stands at 3.75% to 4.5%, slightly up from the previous estimate of 3% to 4%. Despite the upward revision, the outlook suggests muted quarter-on-quarter growth for the second half of the fiscal year, raising concerns among investors.
Q2 financial highlights
In the recently concluded September quarter (Q2FY25), Infosys reported a net profit of ₹6,506 crore, marking a 2.2% increase compared to ₹6,368 crore in the previous quarter (Q1FY25). The company’s revenue rose by 4.3% to ₹40,986 crore, up from ₹39,315 crore in Q1FY25. At the operational level, Earnings Before Interest and Taxes (EBIT) increased by 4.4% to ₹8,649 crore, while the EBIT margin remained flat at 21%.
CEO and Managing Director Salil Parekh emphasized the robust growth, noting a 3.1% quarter-on-quarter increase in constant currency terms, driven by strong performance in financial services. He attributed the growth to Infosys’s expertise in cloud services through its Cobalt platform and advancements in generative AI with Topaz, which have increased client partnerships.
Mixed results and analyst reactions
However, analysts from Nomura described Infosys’s Q2 results as mixed, highlighting a revenue beat but a modest miss on margins. The reported revenue of $4,894 million reflected a 3.1% quarter-on-quarter growth and a 3.3% year-on-year increase in constant currency, exceeding the consensus estimate of 2.9% growth. The growth was partially bolstered by a 0.8% inorganic contribution from a recent acquisition in the technology sector.
Nomura expects EBIT margins for FY25 to be around 20.9%, a modest increase of 20 basis points year-on-year, aligning with the company’s guidance range of 20-22%. They maintained a ‘Buy’ rating on the stock with a target price of ₹2,130, noting that slower-than-expected growth and weaker margins remain key downside risks.
Expectations for future growth
Motilal Oswal highlighted that while Infosys’s Q2 revenue exceeded their estimates, the significant drop in total contract value (TCV) to $2.4 billion—down 41.5% quarter-on-quarter and 68.8% year-on-year—has led them to adjust their projections for FY25. Nevertheless, they remain optimistic about the company’s medium-term prospects, expecting it to benefit from increased IT spending. They set a target price of ₹2,200, indicating a potential upside of 12%, while reiterating their ‘Buy’ rating.
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Similarly, Nuvama recognized that although the revenue growth was acceptable, the decline in margins and TCV fell short of expectations, leading them to reduce their FY25 and FY26 EPS estimates by 4.5% and 1.9%, respectively. They maintained a target price of ₹2,250, emphasizing a ‘Buy’ rating.
Positive market positioning
JM Financial pointed out that Infosys’s revenue growth in Q2FY25 was impressive, with organic growth at 2.3%, exceeding market expectations. The revised FY25 revenue guidance indicates that the initial estimates had sufficient buffers, allowing for healthy sequential performance. They noted sustained discretionary spending in the BFSI sector and a growing adoption of generative AI among clients, positioning Infosys favorably among its large-cap peers.
Consequently, JM Financial raised its target multiple from 27 times to 28 times, maintaining a ‘Buy’ rating with a revised target price of ₹2,150, up from ₹2,050.
In summary, while Infosys raised its FY25 revenue guidance and reported respectable Q2 results, the market’s reaction reflects concerns over slower growth in the latter half of the fiscal year and the significant drop in TCV. Analysts remain cautiously optimistic, with several brokerages reiterating their ‘Buy’ ratings, albeit with adjusted target prices. Investors will be keenly observing how Infosys navigates the challenges ahead while capitalizing on opportunities in the evolving IT landscape.
