Infosys FY24 Guidance Reset and the Ensuing Impact
India’s technological titan, Infosys, recently shook markets with a revision of its FY24 guidance. This blog post presents a meticulous analysis of the potential ramifications of this decision on the stock market, along with a thorough evaluation of Infosys' Q1 2023 results.
Impact on the Stock Market
Infosys plays a significant role in the Indian economy. Any company trajectory shift often sends ripples through the financial markets. The recent guidance reset could trigger short-term volatility in Infosys shares, considering the significant disparity between the previous and current guidance figures.
The company lowered its FY24 revenue growth guidance to 1.0-3.5% YoY CC from a more optimistic 4.0-7.0% YoY CC earlier. This revision resulted from several factors, including lower-than-expected volume, delays in decision-making, and postponements of anticipated mega deals.
Analysis of Infosys Quarterly Results
Revenue for 1QFY24 stood at USD4.62 billion, a 1% increase in constant currency (CC) terms, in line with market expectations. Despite the modest growth, Infosys secured a large deal Total Contract Value (TCV) of USD 2.3 billion, marking an 11% quarter-over-quarter improvement.
An unexpected factor was the drop in net employee count by 6.9k QoQ, although attrition moderated by 360bp QoQ to 17.3% in 1QFY24, providing some relief.
Infosys' New Revenue Growth Guidance
The revised revenue growth guidance took market observers by surprise. The key reasons for this downward adjustment include lower-than-expected volume and discretionary spending, along with delays in decision-making and postponements in anticipated mega deals.
Infosys also faced unanticipated deferrals of projects that held a discretionary nature, pushing them to later stages. However, even with a softer Q1 performance, the deal pipeline remains robust, with multiple large and mega deals actively pursued in areas of cost efficiency, vendor consolidation, and process optimization.
EBIT Margin Guidance for FY24
Along with the revised revenue guidance, Infosys reported a 20bp decline in EBIT margin to 20.8%, missing by 30bp, primarily due to higher employee expenses outpacing efficiency gains. However, despite the steep revenue guidance cut, Infosys confidently maintains its FY24 EBIT margin guidance within the 20-22% range.
Despite this challenging environment, Infosys remains upbeat about its prospects. The company foresees a recovery in demand and believes that this, coupled with its robust deal pipeline, will deliver double-digit growth in FY25.
Revised Infosys EPS Estimates for FY24
In response to the revised guidance, the FY24 Market EPS estimates underwent a downward revision by 4%. The market, too, adjusted its expectations to match the revised guidance. Even so, Infosys continued to display resilience in the face of these adjustments, maintaining FY25 Market estimates largely.
Despite the near-term weakness, Infosys remains well-positioned to benefit from the acceleration in IT spending in the medium term. With this revised outlook, the stock currently trades at 20.5x FY25E Market EPS.
Closing Thoughts
Infosys’ downward revision of its FY24 guidance raised eyebrows, but careful analysis suggests that this decision might represent a strategic shift rather than an indication of operational weakness. It showcases an element of realism that could serve Infosys well in the long run, positioning the tech giant to leverage future market recoveries more effectively.
Understanding the dynamics of companies like Infosys requires a comprehensive study of market trends, internal company dynamics, and global economic indicators. As market observers and participants, we must remember that the road to growth often includes periods of adjustment and recalibration.
By remaining informed and keeping a keen eye on the horizon, we can better navigate the world of financial markets, even in times of unexpected shifts. With Infosys continuing to form a cornerstone of India's IT sector, all eyes will remain fixed on how the company navigates these adjustments and propels itself forward.
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