Infosys Shares Drop 4.5% After Q2 Earnings Miss Market Expectations Despite Revenue Guidance Hike

Infosys Shares Drop 4.5% After Q2 Earnings Miss Market Expectations Despite Revenue Guidance Hike
  • Infosys shares fell by 4.5% to ₹1,880.80 after its Q2 results disappointed investors.
  • The company reported a 5% YoY rise in net profit but failed to meet analysts’ expectations.
  • Infosys raised its FY25 revenue growth guidance to 3.75-4.5%.
  • Market valuation dropped by ₹31,327.94 crore, dragging major indices lower.
  • Analysts remain divided on the stock’s future, with some maintaining a “buy” rating.

Shares of Infosys, India’s second-largest IT services exporter, plunged by 4.5% on Friday morning after its second-quarter results failed to meet market expectations. The stock dropped to ₹1,880.80 on the Bombay Stock Exchange (BSE) and ₹1,880.65 on the National Stock Exchange (NSE). This decline marked Infosys as the biggest laggard among both BSE Sensex and NSE Nifty-listed firms, contributing to a sharp market-wide drop.

Infosys’ market capitalization eroded by ₹31,327.94 crore to ₹7,86,437.37 crore during early trading hours. The broader BSE Sensex tanked 570.45 points to 80,436.16, while the NSE Nifty lost 178.3 points, slumping to 24,571.55, driven by Infosys’ underwhelming results.

Q2 Performance: Mixed Signals

Infosys announced a consolidated net profit of ₹6,506 crore for the July-September quarter, a 4.7% year-on-year (YoY) rise. Although this represents a 2.2% growth over the previous quarter, the numbers fell short of analysts’ expectations, which had forecast a higher profit of around ₹6,700 crore.

Revenue for the quarter grew by 5% YoY, reaching ₹40,986 crore, up from ₹39,360 crore in the same period last year. On a quarter-on-quarter (QoQ) basis, Infosys recorded a 3.1% growth in revenue in constant currency terms. However, despite this growth, investors were disappointed, largely due to the company’s cautious outlook and slower-than-expected recovery in discretionary spending.

Upward Revision of Revenue Guidance Falls Short of Expectations

Despite the disappointment in earnings, Infosys raised its revenue guidance for FY25, anticipating growth in the range of 3.75-4.5% in constant currency, up from the previous estimate of 3-4%. This move marks the second consecutive quarter where Infosys has revised its growth estimates upward, signaling some optimism for the remainder of the fiscal year.

Salil Parekh, CEO and Managing Director of Infosys, referred to the revised guidance as a “huge upward movement,” attributing it to the ramp-up of major deals. However, the market reacted cautiously, with analysts pointing out that the revised forecast fell short of broader market expectations for a more robust recovery in the IT sector.

Factors Contributing to Market Reaction

Several factors contributed to the sharp decline in Infosys’ stock price following the Q2 earnings release. A key issue was the muted outlook on discretionary spending, especially in the financial services sector outside of the United States. Infosys has been facing headwinds in securing large deals, as reflected in the 41% quarter-on-quarter decline in total contract value (TCV) to $2.4 billion.

Furthermore, the company’s operating margin for Q2 remained flat at 21.1%, a marginal YoY decline of 0.1%, suggesting little improvement in profitability. Analysts noted that while the company has managed to maintain its margin guidance of 20-22%, the lack of significant tailwinds in the EBIT margin further dampened investor sentiment.

Brokerage Firms’ Mixed Reactions

Market analysts offered mixed views on Infosys following its Q2 performance. Global brokerage firm Nomura reiterated its “buy” rating with a target price of ₹2,130, noting that Infosys remains a strong player in the IT services sector. Nomura expressed optimism regarding a potential improvement in discretionary demand, particularly with the double-digit growth in smaller deal pipelines.

Bernstein, too, maintained its “outperform” rating, increasing its target price to ₹2,270. The firm highlighted that Infosys continues to outperform its peers, particularly in maintaining deal momentum.

On the domestic front, Motilal Oswal upheld its “buy” rating with a target price of ₹2,200, though it cautioned about the slower-than-expected recovery in discretionary spending. The firm acknowledged Infosys’ resilience but expressed concerns over a muted compound quarterly growth rate (CQGR) for the second half of FY25.

However, not all analysts were bullish. Investec maintained its “sell” rating on Infosys, lowering its target price to ₹1,700. The firm cited the lack of catalysts for a stock recovery in the near term, pointing to weak deal wins and no clear signs of improvement in discretionary spending.

Investor Concerns: Discretionary Spending and Deal Wins

A critical factor influencing investor sentiment has been Infosys’ cautious commentary on discretionary spending. Despite raising its revenue guidance, the company acknowledged ongoing challenges, particularly in the financial services sector outside the US. This sector has seen limited recovery in discretionary expenditures, and Infosys postponed wage hikes for the fourth quarter of FY25 and the first quarter of FY26, signaling uncertainties ahead.

Deal wins during Q2 FY25 were also weaker than anticipated. Infosys secured deals worth $2.4 billion, a 41% decline compared to the previous quarter. While the company reported growth in smaller deals, those worth less than $50 million, analysts are hesitant to consider this a trend, noting the overall weakness in the broader deal pipeline.

Optimism for Future Growth

Despite these challenges, there are signs of potential recovery in the IT sector, with some analysts projecting a rebound in discretionary spending over the medium term. Infosys’ focus on smaller deals could also position it favorably for FY26, as smaller contracts may serve as a precursor to more significant business flow.

The company also remains a key player in the IT services space, with its strategic investments in emerging technologies like artificial intelligence and cloud computing likely to drive growth in the long term. Additionally, Infosys’ announcement of an interim dividend of ₹21 per equity share, to be paid on November 8, 2024, with October 29 as the record date, reflects its commitment to returning value to shareholders.

Short-Term Pain, Long-Term Potential

While Infosys’ Q2 earnings report has disappointed investors in the short term, leading to a sharp decline in its stock price, the company remains well-positioned for future growth. Its upward revision in revenue guidance, along with strong fundamentals in the IT sector, suggests that the current dip may be temporary, with potential for recovery in the coming quarters.