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Q4FY24 Review: Infosys: Weak guidance a reflection of state of IT demand

19 Apr 2024 , 01:08 PM

Infosys (INFO) reported Q4FY24 revenue decline of 2.2% cc QoQ/ flat YoY, below IIFLe of -0.2% cc QoQ, exacerbated by 100bps oneoff impact from renegotiation in one large BFSI client. Hence, Ebit margins also compressed by 40bps QoQ at 20.1%, below IIFLe. INFO guided to FY25 revenue growth of 1-3% cc YoY, implying 1.1- 1.9% Cqgr, and Ebit margin at 20-22%. Deal wins at US$4.45bn (44% new) were strong (80% TTM YoY). INFO continues to face leakage in its discretionary portfolio which is offsetting the strong growth from ramp up of record deal wins. Analysts of IIFL Securities cut FY25-26 EPS by 4% to factor in lower growth; and 12-mth TP to Rs1,550, based on 21x 2YF EPS (from 22x). analysts of IIFL Securities now forecast 6%/12% USD revenue/EPS Cagr over FY24-26. Rebound in discretionary spending would be the key variable to watch out for them, in analysts of IIFL Securities view, even as H1FY25 should see acceleration from deal ramp up and seasonality. ~18% correction in stock price recently has taken care of multiple de-rating while attractive dividend yield (~4%) should provide downside support to valuations. Hence, analysts of IIFL Securities maintain BUY, but expect its discount to TCS to remain elevated in near term.

Weak quarter impacted by one-offs too:

INFO’s revenues declined by 2.2% cc QoQ led by BFSI (-7%), Retail (-4.2%), Manufacturing (-3.2%) and Life Sciences (-6.1%) while Communications (+5.5%) and HiTech (+10.5%) recovered. INFO’s revenue guidance of 1-3% cc YoY in FY25 implies modest Cqgr of 1.1-1.9%. However, with poor revenue visibility, the relevance of annual guidance has reduced despite record deals wins, in analysts of IIFL Securities view.

Margin inch higher ex-one-offs:

INFO saw 40bps QoQ compression in Ebit margins to 20.1%, impacted by 100 bps due to a contract renegotiation, offset by Project Maximus (+40bps) and other one-time tailwinds (+20bps). FY25 margin guidance is a reflection of sub-optimal growth despite presence of levers as part of Project Maximus such as cost optimization, forex and lower sub-con costs. Hiring saw a decline by 2% QoQ even as attrition inched down to 12.6%.

Pick up in discretionary required for re-rating:

While analysts of IIFL Securities believe INFO may find downside valuation support given the recent correction, focus will shift to recovery in discretionary spending in FY25. Hence, analysts of IIFL Securities maintain BUY, though it remains a relative call vs. other large caps, as discount vs. TCS may remain given the weak guidance. Risks: strong INR, attrition.

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