Infosys delivered modest June quarter (Q1FY24) numbers with constant currency (CC) revenue growth of 1 percent, stable EBIT margin and deal wins of $2.3 billion. The shocker, however, is the sharp cut in FY24 revenue growth guidance to 1–3.5 percent from 4–7 percent, despite improving deal wins, mega-deal signings and a strong pipeline. The management has attributed the cut in guidance to delayed decision-making and an uncertain environment compounded by postponement of discretionary spends.
This captures higher-than-expected discretionary spending cuts, which according to brokerage firm Kotak Securities, is an industry-wide, rather than Infosys-specific, phenomenon.
However, another brokerage, Nuvama believes most of the problems faced by India's second-largest software services exporter are company-specific, and not to be seen as a read-across for the sector. The brokerage firm expects Infosys to underperform peers in near-to-medium term.
The software major, however, retained its operating margin guidance of 20-22 percent for FY24.
"Infosys has once again surprised negatively with a steep downgrade on revenues guidance for FY24 to 1.0-3.5 percent versus earlier 4-7 percent, this is much below our expectation of 4-6 percent. The downgrade was driven by delay in deals signing and softness in discretionary portfolio while keeping the EBIT margins guidance unchanged," said Sanjeev Hota, Head of Research at Sharekhan by BNP Paribas.
Infosys posted nearly 11 percent year-on-year (YoY) growth in consolidated net profit for the June quarter to Rs 5,945 crore. This was lower than the CNBC-TV18's poll of Rs 6,193.5 crore.
Consolidated revenue for the quarter under review increased by 10 percent YoY to Rs 37,933 crore.
During the quarter, Infosys reported a constant currency revenue growth of 1 percent, which is not only higher than peers such as TCS, HCL Tech, Wipro and LTIMindtree, but also higher than the CNBC-TV18 poll of 0.7 percent growth.
The company's EBIT margin for the quarter stood at 20.8 percent, which was marginally lower than the CNBC-TV18 poll of 21 percent.
"On the Q1 earnings front, the numbers are broadly in-line with expectations. Q1 FY24 earnings internals look mixed, with a big dip in headcounts sequentially, while deal-wins remained steady at $2.28 billion," Hota said.
Similar to its peers, Infosys also saw attrition levels coming down further in the June quarter. The 12-month trailing attrition rate was down to 17.3 percent in the first quarter as against 20.9 percent in the previous quarter.
The attrition rate was as high as 28.4 percent in the June quarter last year.
The total employee strength as of June end was 3,36,294, down by 6,940 from a quarter ago.
ADR selloff
The American Depositary Receipts (ADR) of Infosys plunged the most since March 2020 after the IT bellwether slashed its FY24 revenue forecast amid slowing discretionary spending in the sector.
"We view the Infosys Q1 earnings performance as a negative read-through for the stock, driven by steep revenues in guidance revision, and also on a relative basis Infosys like to lag industry-level growth in FY24 to peers like TCS and HCL Tech," Hota said, maintaining a 'Hold' rating on the counter.
Analysts divided on near-to-medium prospects of Infy
Analysts were divided on the near-to-medium prospects of Infosys after the software major reported a modest June quarter.
Kotak has maintained a 'Buy' rating on the counter, with an unchanged target price of Rs 1,470. Nuvama has of downgraded the stock to 'Hold', with a target of Rs 1,380 from Rs 1,610 earlier. Motilal Oswal, on the other hand, has a 'Buy' call on Infy, with a target of Rs 1,600. This implies an upside potential of 10 percent from the current market levels.
Infosys' shares were the worst performers on the Nifty 50 index ahead of their Q1 earnings. The stock took a beating in trade Friday, sliding more than 9 per cent as a host of brokerages cut their share price targets on the counter after a downward revision FY24 revenue growth guidance.
(Edited by : C H Unnikrishnan)
First Published: Jul 20, 2023 11:35 PM IST
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