Infosys Q1 Results Review: Guidance Cut Signals Industry-Wide Slump Is Here

The sharp downward revision in Infosys Ltd.’s revenue growth guidance strengthens the case for an industry-wide washout in fiscal 2024.

Analysts now expect the Bengaluru-based software services firm to underperform the $245-billion IT services industry. “While Infosys met Q1 FY24 expectations with revenue of $4,617 million, a key disappointment was that it lowered FY24E revenue growth guidance,” Nomura analysts Abhishek Bhandari and Krish Beniwal said in a July 20 note.

On Thursday, India’s second-largest IT services firm said it expects to clock a constant-currency growth of 1-3.5% in FY24, as compared to 4-7% estimated at the end of the January-March quarter. Infosys cited delays in decision-making by clients and spending cuts as reasons for the steep decline.

“We have seen some of the deal signings and start dates being delayed, and with that, we see a lot of revenue from those large and mega deals towards the later part of the financial year,” said Salil Parekh, chief executive officer at the IT firm, during a post-earnings call. “Through the (June) quarter, we have seen volumes in some of the clients impacted, where they were reducing transformational projects or slowing down decision-making.”

And as if on cue, the stock declined 10% at open on Friday, the most since April 17.

The total traded volume stood at 17.4 times its 30-day average, while the relative strength index was at 46.

Out of the 47 analysts tracking the company, 24 maintain a 'buy' rating, 12 recommend a “hold”, and 11 maintain a “sell” on the stock, according to Bloomberg. The average 12-month consensus price target implies a potential upside of 10%.

Revenue of the company rose 1.31% over the previous three months to Rs 37,933 crore in the quarter ended June 30, according to an exchange filing on Thursday. That compares with the Rs 37,843 crore consensus estimate of analysts tracked by Bloomberg.

Infosys Q1 Results: Key Highlights (Consolidated, QoQ)

• Revenue up 1.3% at Rs 37,933 crore (Bloomberg estimate: Rs 37,843 crore).

• Ebit up 0.17% at Rs 7,891 crore (Bloomberg estimate: Rs 8,983 crore).

• Ebit margin down 23 basis points at 20.80% (Bloomberg estimate: 20.9%).

• Net profit down 3.1% at Rs 5,945 crore (Bloomberg estimate: Rs 6,245 crore).

In constant currency terms, revenue grew 1.0% sequentially.

Motilal Oswal Financial Services Ltd.

• The brokerage has given the IT services firm a 'buy' rating, with a target price of Rs 1,600.

• Infosys has attributed the guidance cut to lower-than-expected volume and discretionary spends, delays in decision-making, and push-outs in anticipated mega deals.

• Despite the steep revenue guidance cut, Infosys has maintained its FY24 EBIT margin guidance at 20–22%, the brokerage said.

• While the guidance cut is concerning and should be negative for the share price in the short term, it views the miss as more of a perception issue rather than an operational one, as the earlier guidance was too optimistic in the current environment.

• Given continued strength in the deal pipeline with a few mega deals and an expected macro recovery over the next few quarters, Motilal Oswal continues to expect double-digit growth in FY25.

Nomura

• The brokerage has a 'reduce' rating with a price target of Rs 1210.

• While Infosys met Q1 FY24 expectations, a key disappointment was its lowering of revenue growth guidance from 4-7% to 1-3.5% for FY24, it said.

• The growth is likely to be back-ended in FY24, driven by the ramp-up of some large deals and winning a few in the pipeline, Nomura said.

• The required revenue growth rate to achieve revised guidance is -0.2% to +1.2% QoQ for Q2 to Q4.

• Infosys reaffirmed its FY24 EBIT margin guidance of 20–22% and noted its five-point program, (AI-driven savings, value-based selling, roll optimisation, indirect cost lowering, and procurement streamlining), which would help it improve margins in the medium term, the brokerage said.

Nirmal Bang Securities Pvt.

• Nirmal Bang has given it a 'sell' rating with a target price of Rs 1,206.

• The new guidance implies -0.2% to 1.3% CQGR for the rest of the three quarters, it said.

• Infosys indicates that growth is backended even in the new guidance, possibly more towards the March 2024 quarter.

• The reasons indicated for the poor growth guidance are broadly in line with what Tata Consultancy Services Ltd. indicated—volume compression in base business and late start dates on new projects won.

• The brokerage suspects its and consensus FY25 earnings may not be as robust as expected, as the US recession gets pushed back into 2024.