Infosys shares brace for selloff post FY24 guidance cut. Stock may underperform peers, say analysts

A commentary on persistent demand slowdown was all expected from Indian IT players following Accenture's uninspiring FY24 guidance, but Infosys slashing its guidance, this time the upper end of the FY24 guidance, for the second straight quarter, was something the market was unprepared for. It completely overshadowed other positives from the Salil Parekh-led firm's earnings.

If an overnight 7 per cent fall in Infosys American depositary receipts (ADR) is any hint, Infosys shares are likely to see a steep fall as the market opens on Friday. This could be a similar fall that the stock witnessed post Q1 results.

Motilal Oswal Securities insisted FY24 guidance cut was surprising but not material. It said Infosys' dollar revenues at $4.72 billion and CC sequential revenue growth at 2.3 per cent QoQ were ahead of its estimates. This was primarily due to a one-time pass-through revenue gain of 160 basis points.

Large deal total contract value (TCV) at $7.7 billion was the highest ever, as Infosys won four mega deals during the quarter. Besides, a 40 basis points margin improvement during the quarter was encouraging and indicated Infosys' ability to manage workforce, analysts said.

"However, despite the strong revenue beat and deal inflow, Infosys surprisingly lowered the upper end of its FY24 revenue growth guidance to 1.0-2.5 per cent YoY CC from 1-3.5 per cent YoY CC earlier, attributing it to continued weakness in discretionary spends and a delay in mega deal scale-up to FY25," Motilal Oswal said while suggesting a share price target of Rs 1,660 on the stock.

"A gap down opening in the Rs 1,400-1,420 range could be seen in the opening trade,” said Prashanth Tapse, Senior VP for Research at Mehta Equities.

Infosys indicated volume compression in base business, cutting of discretionary spending and postponement of discretionary spends and late start dates on new projects won as reasons for guidance cut. Its management expects revenue decline in Q3 due to seasonality and Q4 to be driven by completion of a large deal. It, though, retained its margin guidance of 20–22 per cent.

If one includes TCS and HCL Technologies commentary, the expectation that the December quarter would be flat or show some mild growth sequentially has been belied, Nirmal Bang said adding that the results have likely led to consensus downgrading estimates.

"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. We recently cut FY25 revenue/earnings for the entire sector as we believe our base case of a shallow US recession is pushed back into 2024," it said while suggesting a target of Rs 1,253 on the stock, valuing it at 10 per cent discount to TCS.

Sumit Pokharna, Research Analyst, Vice President at Kotak Securities said weak volumes have been fed into the guidance, which  implies flat to 1.9 per cent decline in revenues in the next two quarters.

"The EBIT margin of 21.2 per cent was ahead of our estimate of 20.6 per cent despite higher pass-through revenues. While net headcount increased by 7.5K employees to 328.7K employee QoQ, the headcount decline on YoY comparison stands at 16.5K employees or 5 per cent. Employee utilisation of ex-trainees has increased, indicating that utilisation has scope to increase further," Pokharna said.

Despite delivering better-than-expected results, Infosys trimmed its guidance, which is a reflection of it facing exceptionally higher ramp-downs than anticipated (higher than peers too), said Nuvama Institutional Equities.

"While the management alluded to strong deal-wins supporting FY25E growth, the weak exit rate of FY24 would mean FY25 growth is likely to be in mid-single digits. We continue to believe that Infosys is going through some company-specific issues (not to be seen as a read-across for the sector), exacerbated by weak macros. We, hence, expect Infosys to underperform peers in near-to-medium term," Nuvama said while suggesting a target of Rs 1,400 on the stock.