Infosys share price slips 4.5% despite raising FY25 guidance; here's why

Infosys Q2 results impact: Share of information technology (IT) giant Infosys slipped up to 4.50 per cent to hit an intraday low of Rs 1,880.80 per share on Friday, October 18. 2024. The fall in the share price came after the management revised its revenue guidance for FY25 to 3.75 per cent-4.5 per cent (vs 3-4 per cent earlier), indicating a muted quarter-on-quarter growth for the second half of the year.

Overall, the IT major’s net profit soared 2.2 per cent quarter-on-quarter (Q-o-Q) to Rs 6,506 crore in the September quarter of FY25, from Rs 6,368 crore in the June quarter of FY25 (Q1FY25).

The company’s revenue rose 4.3 per cent to Rs 40,986 crore in Q2FY25, from Rs 39,315 crore in Q1FY25. 

At the operating level, Earnings before interest and taxes (Ebit) soared 4.4 per cent to Rs 8,649 cr while Ebit margin remained flat at 21 per cent

“We had strong growth of 3.1 per cent quarter-on-quarter in constant current in Q2. The growth was broad based with good momentum in financial services. This stems from our strength in industry expertise, market leading capabilities in cloud with Cobalt and generative AI with Topaz, resulting in growing client preference to partner with us”, said Salil Parekh, CEO and MD. 

Considering these factors, here’s what brokerages had to say about Infosys' Q2 results:

Nomura
 

Infosys reported mixed results for Q2FY25, with a revenue beat but a modest miss on margins, analysts at Nomura said. 

The revenue of $4,894 million represented a 3.1 per cent quarter-on-quarter (Q-o-Q) growth and a 3.3 per cent year-on-year (Y-o-Y) increase in constant currency terms, surpassing the consensus estimate of 2.9 per cent Q-o-Q growth. The revenue growth included a 0.8 per cent inorganic contribution from a recent in-tech acquisition. Growth was led by the Energy sector, which saw a 10.9 per cent Y-o-Y increase, and the Manufacturing vertical, which grew 12.3 per cent Y-o-Y in constant currency. Financial services experienced a 2.3 per cent Y-o-Y growth in constant currency.

Meanwhile, Infosys plans to hire 15,000-20,000 fresh graduates in FY25. Although levers related to subcontracting and utilisation appear to have been maximised, potential gains may still come from growth leverage, value-based selling, automation, and improved role ratios, which could help mitigate expected headwinds from salary hikes in Q4 and transition costs of large deals. 

Thus, Nomura expects an Ebit margin of 20.9 per cent for FY25, reflecting a 20 basis point increase Y-o-Y, consistent with the unchanged guidance range of 20-22 per cent.

The brokerage made minor adjustments to its earnings per share (EPS) estimates for FY25-27, projecting a growth rate of 4.6-7.8 per cent Y-o-Y for revenues in FY25-26. 

Going forward, Nomura said, Infosys is viewed as a strong play for potential improvements in discretionary IT service demand, highlighted by the double-digit growth in the small deal pipeline. Therefore, analysts have maintained a ‘Buy’ rating with a target price of Rs 2,130, based on 27 times FY27 EPS. 

Key downside risks, they believe, include slower-than-expected growth and weaker margins.

Motilal Oswal
 

Those at Motilal Oswal said, Infosys reported Q2FY25 revenue of $ 4.9 billion, reflecting growth of 3.1 per cent Q-o-Q and 3.3 per cent Y-o-Y in constant currency, compared to its estimate of 3.0 per cent Q-o-Q. Ebit margins were recorded at 21.1 per cent, exceeding the estimate of 20.3 per cent. 

Looking ahead to the second half of FY25, analysts at Motilal Oswal anticipate revenue, Ebit, and PAT growth of 8.1 per cent, 8.8 per cent, and 10.4 per cent Y-o-Y.

Despite a major drop in total contract value (TCV) to $ 2.4 billion (down 41.5 per cent Q-o-Q and 68.8 per cent Y-o-Y), analysts have made slight adjustments to their estimates for FY25, FY26, and FY27 due to slower expected revenue growth in the near term. They view the retention of margin guidance at 20-22 per cent as encouraging. 

Consequently, Motilal Oswal expects Infosys to be a key beneficiary of increased IT spending in the medium term, valuing the company at 28 times the September 2026 EPS, resulting in a target price of Rs 2,200, which indicates a 12 per cent upside. The brokerage reiterated its ‘Buy’ rating.

Nuvama
 

Nuvama noted that Infosys' Q2FY25 results were mixed but largely in line with expectations. While the revenue growth was considered decent, Nuvama noted that margins and TCV fell short of expectations. Thus, analysts at Nuvama have reduced FY25 and FY26 EPS estimates by 4.5 per cent and 1.9 per cent, respectively, primarily due to a higher tax rate in FY25. 

Nuvama, however, continues to value Infosys at 28 times the September 2026 EPS, maintaining a target price of INR 2,250, which remains unchanged. They retain a "Buy" rating.

JM Financial
 

Lastly, analysts at JM Financial said that Infosys' Q2FY25 revenues grew by 3.1 per cent in constant currency, with organic growth at 2.3 per cent, outperforming market expectations. The company raised its FY25 revenue guidance from 3-4 per cent to 3.75-4.5 per cent. JM Financial previously suggested that the initial guidance had sufficient buffers for project run-offs, which appear to have eased, contributing to healthy sequential performance as deal ramps reflect in the results.

With indications of sustained discretionary spending in BFS and broader adoption of generative AI among clients, JM Financial believes Infosys is well-positioned among large-cap peers to capitalise on a demand recovery. 

Therefore, JM Financial analysts have raised their target multiple to 28 times (from 27 times) while keeping EPS estimates largely unchanged, maintaining a ‘Buy’ rating with a revised target price of Rs 2,150 (up from Rs 2,050).