Infosys stock tumbles but analysts maintain ‘Buy’ rating on Infosys despite sharp cut in revenue guidance

• Market expects Infosys to exit FY24 with revenue growth of 3%, which is the upper end of its guidance.
  
• The sudden and significant reduction in revenue growth guidance during the first quarter of FY24 is unexpected for a company that has been leading the sector in terms of growth.
  
• After Friday’s fall, stock was trading in line with its 10 year average but below its 5 year average.
  

Shares of Infosys fell by more than 8% on Friday in line with the 9% fall in ADRs on Thursday, after the company sharply cut its revenue guidance for the ongoing fiscal year. Given that the company has reset growth expectations for the rest of the fiscal year, there is little downside left for the stock. The market is of the view that revenues will continue to remain under pressure for the remaining three quarters as well. Two of its key business verticals – financial services and retail – have underperformed during the quarter, even though the headline figures were largely in line with the market’s expectations.

Given that discretionary spends across mortgage, investment banking, asset management and payments are weak, conversion of deals into revenues will continue to be a challenge for the company. The cut in its guidance implies a 0.2-1.8% CQGR (compounded quarterly growth rate) for the remaining three quarters. Jefferies expects the company to grow its constant currency revenues by 3% year-on-year in FY24.

Interestingly, after the stock fell in morning trade by over 8%, analysts believe that the stock may continue to be a buy. American Depository Receipts of Infosys fell by 9% after the company announced its Q1 results. Infosys stock after the fall would be trading at 19x FY25 EPS, which is in line with its 10 year average and 13% below its five year average, says Jefferies. Kotak too has retained a ‘Buy’ rating on the stock despite the disappointment from the material guidance cut.

According to Kotak Institutional Equities, “A sudden sharp cut in revenue growth guidance in 1QFY24 is surprising for a company at the top of the game and leading growth charts. This does warrant a closer scrutiny although there is nothing in metrics that suggests loss of competitiveness or wallet share.”

The brokerage firm has cut FY2024-26 revenue forecast by 2-3% and FY2024E c/c revenue growth forecast to 3.3% from 4.9% earlier. It has also cut EPS estimates by 2-3% baking in lower growth and marginal cut in margins, offset by change in INR/USD assumption. Like other leading broking firms, it has also maintained a “Buy” rating, valuing the company at an unchanged multiple of 20 times June 2025 EPS. The fair value of Infosys shares remained unchanged at ₹1,470.

A cut in the revenue growth guidance by IT bellwether Infosys was a key disappointment that led to Dalal Street tumbling in early morning trade. The company said on Thursday that it expects to grow its revenues between 1%-3.5% in FY24 against 4-7%.

Given that the quarterly numbers do not bear any red flag, Infosys may be playing it safe by cutting its revenue guidance going by the environment in its key markets. The company has been in the habit of underpromising at the start of the year only to beat its own guidance later. However, for the last two quarters the market has been taken by surprise.

Nomura: Stock downgraded from neutral to reduce

In the light of the revised FY24-25 revenue estimates, the earnings for that period are anticipated to decrease by approximately 3-4%, resulting in lower earnings per share (EPS) estimates, which are now 5-6% lower, according to Nomura’s Global Market research. Due to these adjustments, the stock has been downgraded from ‘neutral’ to ‘reduce’.

The revised target price for the stock is set at ₹1,210 (previously ₹1,260) at an unchanged 18 times the forecasted FY25 EPS. This multiple is lower than the five-year average of approximately 20 times. The current trading value of the stock stands at approximately 21.7 times the forecasted FY2025 EPS.

Kotak Institutional Equities: Buy rating maintained

The sudden and significant reduction in revenue growth guidance during the first quarter of FY24 is unexpected for a company that has been leading in terms of growth, as per analysts at Kotak Institutional Equities. While there are no apparent signs of lost competitiveness or market share, a closer examination is warranted. As a result, the forecasted revenue for FY2024-26 has been revised downward by 2-3%, with estimated FY2024 constant currency revenue growth forecast reduced to 3.3% from the previous 4.9%.

The EPS estimates have also been lowered by 2-3% to account for the reduced growth and a slight decline in margins. However, these adjustments are offset by a change in the INR/USD assumption. Despite the revisions, the report maintains a BUY rating for the company and values it at an unchanged multiple of 20 times the estimated June 2025 EPS, resulting in an unchanged fair value of ₹1,470.

Jefferies Equity Research: Recommendation remains a BUY

Jefferies has reduced its EPS estimates for FY 20244-2026 by up to 2%, while still expecting Infosys to achieve an EPS CAGR (Compound Annual Growth Rate) of 10% over FY 2023-2026.

They believe that the company's new guidance poses limited earnings risks. Despite a 9% decline in Infosys' American Depository Receipts (ADRs) at the time of writing, if the stock experiences a similar fall tomorrow, it will be trading at 19 times the FY2025 EPS, aligning with its ten-year average and 13% below its five-year average, both of which are considered reasonable valuations. With the stock priced below the average price-to-earnings ratio based on realistic earnings, the recommendation remains a BUY, with an unchanged price target of ₹1,550, based on 22 times the forward EPS for the next 12 months.

Recommendation remains a BUY: Motilal Oswal Financial Services

Meanwhile, analysts at Motilal Oswal Financial Services have revised their guidance FY2024 estimates, which were initially at 3.8% YoY CC (year-on-year constant currency), by 120 basis points (bps) due to weaker demand commentary and project delays, despite the 325 bps cut in guidance at the midpoint. Based on their assessment, they value the stock at ₹1,600 at 22.5 times estimated FY25 EPS. The recommendation for the stock remains a BUY, with a reiteration of their positive rating.