Infosys nosedives 10% on sharp guidance cut; fuels brokerage downgrades

Infosys’ surprising guidance cut triggered a flurry of estimate cuts from several brokerages, some even downgrading the stock

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Shares of information technology major Infosys plummeted 10 percent in early trade on July 21 as the company slashed its FY24 revenue guidance. On top of that, the company’s net profit for the April-June quarter also missed the Street’s expectation, which also fanned the weak sentiment.

In a negative surprise for the Street, the IT major slashed its revenue growth guidance for the current fiscal to 1-3.5 percent from 4-7 percent, a cut that was steeper than expected by market participants. The firm cited a challenging macroeconomic environment as the reason behind the cut in guidance.

The sharp cut in the IT services company’s revenue guidance did not sit well with investors. A reflection of the dented sentiment was also seen in the 8.4 percent slide in the ADRs (American Depository Receipts) of Infosys on NASDAQ on July 20, after the company’s results were announced.

At 09.19 am, shares of Infosys were trading 8.25 percent lower at Rs 1,329.85 on the National Stock Exchange.

Also Read: Infosys’ ADR opens 9.7 percent lower on Nasdaq on weak revenue guidance

Moreover, the company’s topline for the April-June quarter, which came at Rs 5,945 crore was also below CNBC-TV18’s estimate of Rs 6,193.5 crore. On a year-on-year basis, the bottomline rose 11 percent, but sequentially it was down 3 percent.

Its consolidated revenue increased 10 percent on year to Rs 37,933 crore, marginally beating the market expectations of Rs 37,716 crore. On a sequential basis, the topline rose 1.3 percent.

Operating margin also fell 20 basis points to 20.8 percent, down from last quarter’s 21 percent. Regardless, the management chose to retain its operating margin guidance at 20-22 percent for FY24.

Taking note of the subdued quarterly performance and a weak growth guidance, some brokerages, including the likes of Macquarie and Nomura downgraded Infosys, while others forecasted caution.

Macquarie downgraded the stock to ‘underperform’ as it was disappointed by the IT behemoth’s deal wins in Q1. The brokerage also doesn’t see the $2 billion framework deal as a ‘mega deal’ as it is just an estimate by the management. Macquarie is also skeptical of Infosys winning a fair share of outcome-oriented managed services deals in the coming quarters.

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Nomura was another brokerage that downgraded Infosys to ‘reduce’ along with a cut of nearly 1 percent in its target price for the stock to Rs 1,210. The firm also reduced its FY24-25 EPS estimates for Infosys by 3-4 percent to factor in the weak Q1 earnings.

The firm sees weakness in growth magnifying for the IT company with its guidance cut. “Lowering Of guidance reflects pullback in discretionary demand and slow decision making,” Nomura stated in its report. Moreover, the brokerage also predicted EBIT margin for Infosys to be around the mid-point of its guided range of 20-22 percent in FY24.

Other brokerages, Jefferies, Bank of America Securities, Motilal Oswal Financial Services, Nuvama Institutional Equities and HSBC also lowered their FY24/FY25 EPS estimates for the IT major by 2-6 percent.

Also Read: Infosys slashes FY24 revenue guidance to 1-3.5%, profit increases 11% YoY

Going ahead, Jefferies sees limited risk of further earnings cut for Infosys and expects a 10 percent EPS CAGR (Compounded Annual Growth Rate) over FY23-FY26. HSBC feels the guidance cut reflects the weakness across the sectoral but also feels there may be some company related issues as well.

JPMorgan on the other hand feels that the sharp guidance cut brings a welcome dose of realism, which should be extended to the valuation of Infosys. The firm expects the miss on net profit and guidance cut to have a bearing on the valuation of Infosys in the short-to-medium term. MOFSL also seconded the idea as it also sees the FY24 guidance reset adversely impacting the near term view for the stock.

However, the broking firm retained its long-term positive stance on Infosys as it expects it to be a key beneficiary of the acceleration in IT spends in the medium term.

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