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Infosys Ltd.'s performance in the September quarter (Q2FY25) has sent a wave of uncertainty through the investment community. While the IT giant reported a sequential constant currency (CC) revenue growth of 3.1%, surpassing consensus estimates, the overall results fell short of market expectations, leading to a nearly 5% decline in its share price on Friday. This dampened investor enthusiasm, highlighting concerns about the company's trajectory amidst a challenging global economic landscape.
Despite exceeding revenue growth expectations, Infosys's cautious tone regarding future prospects and the lackluster performance in discretionary IT spending raised alarm bells among investors. The company raised its FY25 CC revenue growth guidance from 3-4% to 3.75%-4.5%, but this upgrade was seen as minimal given the strong performance in the first half of the fiscal year. The management's comments on limited signs of recovery in discretionary expenditure, particularly outside the US banking sector, fueled further skepticism.
The subdued performance in large deals, with a 42% sequential and 69% year-on-year decline in total contract value to $2.4 billion, further indicated a cautious approach by clients. While Infosys won 21 large deals in Q2FY25, these were primarily focused on cost optimization, underscoring the prevailing economic uncertainty and the reluctance of companies to embark on major IT investments. The flat Ebit margin at 21.1%, despite expectations of a sequential expansion, also pointed towards a challenging operating environment.
Analysts remain cautious about the near-term outlook for Infosys. The muted growth projections for Q3 and Q4, coupled with the impact of deferred wage hikes, suggest that margins will be under pressure. While offshoring and pyramid rationalization may help mitigate some of the negative impact, analysts are reducing their margin estimates for the company. This cautious outlook stems from the ongoing uncertainty about the global economic recovery and the slow pace of growth in discretionary IT spending.
Although the US Federal Reserve's recent interest rate cut has sparked optimism about a potential rebound in IT demand, the near-term outlook remains unclear. While Infosys is well-positioned to benefit from a recovery in discretionary IT spending, the company's current valuation, on par with Tata Consultancy Services Ltd at nearly 26 times FY26 price-to-earnings, suggests that investor confidence is yet to fully materialize. Until clear signs of a rebound in discretionary spending emerge, Infosys's valuation comfort remains elusive.