Street disappointed with Infosys' second consecutive guidance cut estimates
Infosys' Q2 FY24 results received a mixed reaction from analysts. The company showed a strong performance with a 2.3% quarter-on-quarter revenue growth. However, analysts were surprised by the second consecutive guidance cut this year.
The Indian IT services company lowered its revenue growth guidance to 1-2.5% for FY 2024 from the previous estimates of 1-3% citing challenges in discretionary spending and slow decision-making in the market.
Infosys reported a strong September quarter surpassing street estimates. This was primarily driven by improved realisation and one-time benefit from pass-throughs partially offset by volume decline.
The company's net profit rose 3.17 per cent to Rs 6,212 crore, compared to Rs 6,012 crore in the same period last year. he company's EBIT margins improved by 40 basis points to reach 21.2%.
“Infosys’s 2Q performance was better than expectations but further downward revision
in FY24E sales guidance despite very strong order intake was a key negative surprise,” said Equirus Securities.
JM Financial lowered the company’s price target to Rs 1,350 fro Rs 1,466 while Nuvama increased the company’s price target to Rs 1,400 from 1380.
Antique Stock Broking reduced Infosys' TP to INR 1,490 (from INR 1,550) and cut its EPS estimate to 3-4%.
While the IT major is likely to see an improvement in its margin and revenue due to the strong order book, longer term performance could be impacted by delayed macro recovery impacting deal closures and rising pricing pressures, noted several of the analysts.
“This will be taken as a negative by investors as the ask rate is very low, implying weak revenue trajectory for the H2,” Phillip Capital.
Because of such concerns, analysts are concerned about the company's ability to deliver consistent and predictable growth.
“..the longer the delay in deal ramps, larger could be backfill requirement as book of business continues to run-off, curtailing absolute incremental revenue growth, in our view,” said analysts from JM Financial and maintained ‘HOLD’ rating on the stocks.
However, the company anticipates meaningful ramp-ups are likely to occur towards the end of FY24 or in FY25.
“The revenue guidance of 1%-2.5% cc YoY in FY24, implies sequential decline in revenues in 2H [second half], partly driven by usual seasonality. With another cut in guidance despite record deals wins, its relevance has diminished and they need to display strong execution to regain investor confidence, in our view,” IIFL Securities.
Even the company’s alltime record $7.7 billion in new deals was not enough to assuage analysts’ concerns.
"We continue to believe that Infosys is going through some company-specific issues , exacerbated by weak macros. We, hence, expect Infosys to underperform peers in near-to-medium term," said Nuvama Institutional Equities.
Among the business segments, revenue from the key financial services and communication declined 7.3 per cent and 4.3 per cent YoY, respectively.
“The financial services vertical continues to be impacted by macroeconomic uncertainties coupled with softness in the mortgages and investment banking segments, while the company is experiencing strong performance in the manufacturing and life sciences verticals,” noted Antique Stock Broking.
Strong FY 2025?
There is a degree of uncertainty surrounding Infosys' growth prospects for FY25.
While the company's record deal wins and strong order book are positive indicators, concerns about the weak exit rate in FY24 and challenges in discretionary spending have left some analysts cautious about the company's ability to achieve robust growth in the upcoming fiscal year.
The extent to which Infosys can deliver on its potential for growth in FY25 will depend on its ability to address these challenges and capitalize on the opportunities presented by its deal wins and order book.
“While the management alluded to strong deal-wins supporting FY25E growth, the weak exit rate of FY24 would mean FY25 growth is likely to be in midsingle digits,” noted Nuvama.
Antique Stock Broking highlighted that FY25 visibility seemed to be improving due to the record deal wins during the quarter. The company's strong order book was seen as a positive sign, potentially laying the foundation for growth acceleration beyond FY24.
“As per Infosys, strong order book will result into acceleration in growth beyond FY24E as it expects ramp up in later part of 4Q,” noted Equirus Securities adding that it believes Infosys' growth lag in FY24 was transient and could likely bounce back in FY25, provided there were no major adverse macroeconomic events in the US and Europe.
Shares of Infosys fell by 2.8% to Rs 1,424 on Friday following the company’s second-quarter results.