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Infosys, India's second-largest IT services company, experienced a significant stock decline on October 18th, 2024, following the release of its Q2 FY25 financial results. The company's shares tumbled 5% to ₹1,869, primarily driven by investor disappointment over the lower-than-expected Q2 performance and the company's revised revenue guidance. This downturn highlights the challenges faced by Infosys, and the broader IT sector, as they grapple with a sluggish global economic environment and a tepid recovery in discretionary spending.
Despite a 5% year-on-year increase in profit after tax to ₹6,506 crore, the figure fell short of analysts' expectations of ₹6,700 crore. Revenue from operations reached ₹40,986 crore, slightly surpassing the anticipated ₹40,890 crore. While segment-wise growth demonstrated positive trends in financial services, energy and utilities, manufacturing, and communication, the retail segment experienced a decline of 9.6% year-on-year. The EBIT margin remained flat quarter-on-quarter at 21.1%, and the total contract value (TCV) of large deals dropped to $2.4 billion, a significant decrease from the $4.1 billion recorded in Q1 FY25.
While Infosys raised its revenue growth guidance for FY25 to 3.74%-4.5%, up from 3%-4% previously, this revised guidance was still viewed as underwhelming by analysts. Motilal Oswal, a domestic brokerage firm, noted that despite a broad-based revenue growth this quarter, Infosys' commentary and guidance dampened hopes for a substantial rebound in discretionary spending. The company observed limited signs of recovery in discretionary expenditures, especially outside the US banking sector, prompting a postponement of wage hikes to the fourth quarter of FY25 and the first quarter of FY26. This move underscores the ongoing uncertainties and cautious outlook within the industry.
Despite the challenging environment, Motilal Oswal expressed a degree of optimism regarding the double-digit year-on-year growth rate in smaller deals (less than USD 50 million total contract value). While Infosys itself was cautious about declaring this as a trend, Motilal believes these developments signal an early return of business flow to both Infosys and the sector, positioning it favorably for FY26E. Following the company's Q2 performance, Motilal Oswal slightly adjusted its estimates for FY25/FY26/FY27E, reflecting a slower revenue growth outlook for the near term. Nonetheless, the brokerage maintained its margin guidance of 20-22%, viewing this positively.
Centrum Broking also expressed a cautiously optimistic view, stating that the near-term demand landscape is gradually improving, particularly within the banking, financial services, and insurance (BFSI) sector. The demand for AI solutions aimed at boosting productivity is steadily increasing with each passing quarter. The revised revenue growth guidance to 3.75%-4.5% also indicates an improvement in the demand environment. As a result, Centrum Broking maintained its 'Add' rating on the stock with a revised target price of ₹2,122, a significant increase from the previous ₹1,864, reflecting a PE of 25x on FY26E.
While both Motilal Oswal and Centrum Broking acknowledge the present challenges and uncertainties, they also highlight the positive aspects of the company's performance, particularly the growth in smaller deals and the increasing demand for AI solutions. This suggests that despite the current slowdown, Infosys is well-positioned to benefit from the anticipated acceleration in IT spending in the medium term. Despite the immediate setbacks, the long-term outlook for Infosys remains promising, contingent on the successful navigation of the global economic headwinds and the timely recovery in discretionary spending.
Source: Infosys share price dips 5% as Q2 numbers miss expectations, guidance disappoints