Infosys, one of the largest IT players, surprised the market with strong revenue growth in the June quarter. The company’s revenue grew by 1% in constant currency, surpassing analyst expectations. However, Infosys also lowered its growth guidance, which took brokerages by surprise.
Following the downward revision in its FY24 revenue guidance, brokerages unanimously reduced their FY24 EPS estimates for Infosys by 2-4%. Analysts believe that there may be further downside for the company, despite the already reduced estimates.
Macquarie and Nomura, global brokerages, downgraded Infosys to underperform and reduce ratings, respectively. Nomura also cut the target price for the company. They stated that the lowered guidance reflects a pullback in discretionary demand and slow decision-making, which has magnified the growth weakness.
Antique Broking analysts anticipate that the guidance cut will lead to a de-rating, especially considering the significant rise in Infosys’ stock in recent months. JP Morgan maintained its underweight rating on the company, stating that the guidance cut brings a much-needed dose of realism that should be extended to valuations.
In terms of target price cuts, PhillipCapital made the sharpest reduction, lowering it from Rs 1,580 to Rs 1,390. They also downgraded Infosys to neutral from buy and slashed the FY24-FY25 EPS estimate by 4-6%.
Despite the reduced growth guidance, Infosys reported strong large deal wins for Q1, with a 9.5% increase quarter-on-quarter and a 35.3% increase year-on-year at $2.3 billion. However, the company mentioned that revenues from some mega and large deals in the pipeline will accrue only in the later part of this financial year.
In the short term, Infosys expects to see some clients halt or slow down transformation programs and discretionary work, especially in financial services, mortgages, asset management, investment banking, and payments, as well as telecom. The impact will also be felt in the hi-tech industry and certain retail segments. Financial services and retail are Infosys’ largest verticals, accounting for nearly 50% of its revenues.
While several brokerages lowered their EPS estimates for Infosys, some maintained hold-to-buy ratings on the stock. They believe that the revised growth estimate is a course correction rather than a sign of further deterioration in the demand environment. However, analysts expect deeper cuts in the consensus estimate for the company.
Kotak Institutional Equities, Motilal Oswal Financial Services, HDFC Securities, and JM Financial Services are among the brokerages that maintained positive ratings on Infosys but lowered the EPS estimates.
Analysts at Motilal Oswal stated that the guidance cut may negatively impact the share price in the short term, but view it as more of a perception issue rather than an operational one. They believe that the earlier guidance was overly optimistic in the current environment. JM Financial analysts also expect further cuts in the consensus estimate for Infosys.
Overall, the news highlights Infosys’ strong revenue growth, but also its revised growth guidance and the subsequent impact on brokerages and market sentiment. The IT company’s large deal wins remain robust, but the short-term outlook is affected by clients’ reduced spending on transformation programs and discretionary work in various industries. While some brokerages downgrade their ratings and target prices, others maintain positive sentiments, recognizing the need for a more realistic growth outlook.
-Google News
