Infosys Ltd has significantly lowered its revenue growth guidance for FY24 and this is likely to come as a rude shock for investors. Yes, the information technology (IT) company was widely anticipated to trim its guidance for the year given looming recession fears. However, the actual cut is deeper-than-expected, to 1-3.5% from 4-7%. This was despite Infosys clocking large-deal total contract value to $2.3 billion in the June quarter (Q1FY24).
“Its revised guidance implies a 0.2-1.8% compound quarterly growth rate over the remaining three quarters of FY24 which seems achievable given its recent deal wins,” analysts from Jefferies India said in a report.
According to Infosys management, overall, decision making among clients has slowed down. In segments such as banking, financial services, insurance, and telecom, clients are reducing their volume of work and looking at cutting discretionary technology spending. Secondly, while the company has bagged large deals, there is a lag in implementation, so revenue from them would reflect in the second half of FY24, the management said.
But as things stand, this is unlikely to go down well with investors who are already edgy. “Infosys has once again surprised negatively with a steep downgrade on revenues guidance for FY24,” said Sanjeev Hota, head of research, Sharekhan by BNP Paribas in his note.
Meanwhile, Infosys’ sequential constant currency revenue grew 1%, marginally ahead of consensus estimate and better than close competitor Tata Consultancy Services Ltd (TCS). Ebit margin at 20.8% fell 20 basis points sequentially, imp-acted by employee costs. For FY24, Infosys retained its operating margin guidance at 20-22%. To meet this, the management will focus on improving productivity and reducing indirect spends. But the impact of impending wage hikes on margin needs to be watched.
Meanwhile, so far in 2023, Infosys stock has fallen nearly 4%, lagging Nifty IT index which has rallied by almost 9%. Apart from macro-concerns hurting the sector’s near-term revenue visibility, company-specific factors such as exits at top management level, have also been a sore point for Infosys’s investors.
The stock trades at FY25 price-to-earnings multiple of 20.44x, a discount to TCS’ 24.36x multiple, Bloomberg data showed. “The Street is likely to see the revised FY24 guidance by Infosys as a conservative one, especially given the deal pipeline, thus inviting further earnings downgrades for Infosys for FY24. So, the valuation gap between Infosys and TCS is likely to widen ahead,” said an analyst on condition of anonymity.
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Updated: 20 Jul 2023, 10:35 PM IST
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