Infosys Q2 Results Review: Guidance Cut Points To Pullback In Discretionary Demand

Infosys Ltd.’s decision to once again pare its guidance has come as a surprise to many, but the move isn’t without its reasons.

India’s second-largest information technology services firm is factoring in a seasonal weakness in the second half of the fiscal, more so this year, due to a macro overhang, according to analysts. Dealmaking is at an all-time high, sure, but skewed in favour of the long-term projects that’ll fructify only in the early part of the next fiscal. Discretionary spending has dried up as enterprises in the U.S. and beyond cut back on technology to cope with high interest rates and inflation.

“The reasons for the weak guidance are broadly in line with what its peers have indicated—volume compression in the base business, cutting of discretionary spending, and late start dates on new projects won,” Nirmal Bang Securities Pvt. said in an Oct. 13 note. “We have been negative on the stock and the sector for the last 18 months. We continue to be cautious even now, as we believe the worst on the macro front is ahead of us and not behind us.”

Motilal Oswal Financial Services Ltd. was more circumspect in its assessment.

“The FY24 guidance cut was surprising but not material,” the Mumbai-based brokerage said in an Oct. 13 report. “While we see this as a negative and expect near-term pressure on the share price … we see limited damage to Infosys’ growth story from the back-to-back cuts.”

Revenue of the IT bellwether rose 2.8% over the previous three months to Rs 38,994 crore in the quarter ended Sept. 30, according to an exchange filing on Thursday. That compares with the Rs 38,503-crore consensus estimate of analysts tracked by Bloomberg.

Infosys Q2 FY24 Key Highlights (Quarter-on-Quarter):

• Revenue up 2.8% at Rs 38,994 crore (Bloomberg estimate: Rs 38,503 crore).

• Ebit up 4.8% at Rs 8,274 crore (Bloomberg estimate: Rs 8,088 crore).

• Ebit margin at 21.20% versus 20.80% (Bloomberg estimate: 21%).

• Net profit up 4.5% to Rs 6,215 crore (Bloomberg estimate: Rs 6,266.5 crore).

• Interim dividend of Rs 18 per share declared.

• Attrition rate at 14.6% versus 17.3%.

In dollar terms, Infosys’ revenue rose 2.2% sequentially to $4.718 million in the September quarter. It was up 2.3% in constant currency terms.

The company has now pegged its constant-currency revenue growth at 1-2.5% in the fiscal ending March 31, 2024, as against 1-3.5% estimated at the end of the previous quarter. It had guided 4-7% revenue growth in FY24 at the end of the previous fiscal.

Infosys now aims to achieve operational profitability of 20–22% in FY24.

Phillip Capital 

• Maintains a 'neutral' rating with a target price of Rs 1,450 (Rs 1,480 earlier).

• Ebit margin of 21.2% was largely in line with the street estimates.

• Pipeline commentary was positive, including cost takeout and efficiency deals.

• Expects stock to underperform versus peers due to no meaningful improvement in growth.

• Cut FY24-26E PAT estimates by 2-3% on lower growth assumptions. 

• Forecast USD revenue growth of  2.5/7.5/9.5% in FY24/25/26.

• Values Infosys at 20 times average of FY25-26 EPS.

Nomura 

• Remains 'neutral' with a reduced target price of Rs 1,400 (earlier Rs 1,410).

• Guidance cuts despite strong execution and deal wins are surprising.

• Guidance cuts overshadow strong execution in Q2 FY24.

• Lowered guidance reflects a pullback in discretionary demand and slow decision-making.

• Estimates Ebit margin of 20.8% for FY24F and 21.3% for FY25F.

• Lower FY24-26F EPS by 1-2%; EPS estimates are 3-5% lower than the street's.

Nirmal Bang

• Reiterates ‘sell’ with a steady target price of Rs 1,253/share.

• Estimates USD revenue growth at 2.5%—the upper end of guidance.

• CQGR is likely to decline by 0.6% in the second half of FY24.

• Expects some one-time realisation drivers to also reverse.

• Values Infosys based on Sept 2025E, keeping multiples at 18 times.

Motilal Oswal

• Maintains ‘buy’ with a steady target price of Rs 1,660 per share.

• Adjusts FY24/FY25 EPS estimates by +1.4%/-1.4% to factor in Q2.

• Values stock at Rs 1,660, at 24 times FY25E EPS.

• FY24 topline guidance implies tough Q3 FY24.

• Expects Infosys to deliver 9% CAGR in INR PAT over FY23-25E.