Q1FY24 Review: Infosys: Surprising guidance cut makes FY24 a washout

21 Jul 2023 , 11:13 AM

Infosys (INFO) reported Q1FY24 revenue growth of 1% cc QoQ/ +4.2% YoY, in line with IIFLe, while EBIT margins were down 20bps QoQ at 20.8%, largely in line with IIFLe. However, INFO cut its FY24 revenue growth guidance to 1.0-3.5% cc YoY (from 4-7%) citing cuts and delays in discretionary spending as well as late ramp ups in large deals. It implies a modest CQGR of ~0.3-1.9%. Ebit margin guidance of 20-22% was maintained. Deal wins at US$2.3bn (56% new) were strong (21% TTM YoY) with another USD2bn deal won in July. Analysts of IIFL Capital Services cut FY24-26 EPS by 4-5% to factor in lower growth resulting in analysts of IIFL Capital Services 12-mth TP reducing to Rs1,430, based on 20x 2YF EPS. With such a sharp guidance cut so early in the year, they believe the same has lost relevance and the outlook is a reflection of portfolio headwinds. They now forecast 6%/10% USD cc revenue/ EPS Cagr over FY23-25. Analysts of IIFL Capital Services expect stock to bottom out post the result reaction. Shifting of focus towards cyclical recovery in FY25 and an attractive dividend yield (~4.5%) may provide downside support to valuations. Hence, while Analysts of IIFL Capital Services maintain BUY, they expect its discount vs. TCS to remain elevated and continue to prefer TCS.

Growth recovered from Q4 lows: 

INFO’s revenue growth improved from Q4 lows led by Manufacturing (5.7% cc QoQ), Hi-Tech (1.7%) and Life Sciences (1.3%) while BFSI (-1.8%) and Retail (-0.8%) declined. INFO’s revenue guidance of 1-3.5% cc YoY in FY24, implies modest CQGR through FY24, and potentially builds in reasonable conservatism despite strong deal wins. With such a sharp cut in guidance despite strong deals, its relevance has diminished and they need to display strong execution to regain investor confidence, in analysts of IIFL Capital Services view.

Margin stable despite modest growth: 

INFO saw 20bps QOQ decline in EBIT margins in at 20.8%, which suggests good execution despite modest revenue growth, in analysts of IIFL Capital Services view. FY24 margin guidance is also a reflection of suboptimal growth despite presence of levers such as cost optimization, forex and lower sub-con costs. Hiring saw a decline by 2% QoQ even as attrition collapsed.

Valuations may get support:

Post a potential sharp correction in the stock price after results, INFO may find valuation support as focus shifts to cyclical recovery in FY25 and its dividend yield of ~4.5% look attractive. Hence, while analysts of IIFL Capital Services maintain BUY, it is a relative call vs. other large caps, with preference for TCS over INFO now, given the lack of INFO’s growth outperformance in FY24. Risks: strong INR, attrition.