Infosys’ key revenue and operating profit/margin numbers were broadly in line with consensus estimates. Net income was 4.5% lower than expected, but investors are likely to ignore the impact given that it was due to one-time/non-operating items. The results show that while weakness in North America (58% of sales) remains, good growth in Europe compensates to some extent. But overall, there’s not much to complain about, other than the fact that big deal wins were lower than expected at $2.4 billion in the quarter compared to $4.1 billion in the previous quarter.
Second-quarter constant currency (CC) revenue growth was also consistent at 3.3%, but the company raised its FY2025 CC revenue growth guidance to a range of 3.75-4.50% from the 3-4% indicated at the time of the announcement. Ta. As of Q1 results. However, it’s important to note that this approximately 60 bps (midpoint) increase in full-year earnings guidance is not much to celebrate for two reasons.
One example of this is the company’s expected sales growth rate of 4.125% in FY25, following a weak FY24 in which the company grew at just 1.4%. This means that the CAGR of revenue from FY2023 to FY2025 is only 2%. This, coupled with the fact that operating margins remain flat for the two years to end-FY25 at around 21%, suggests low-single-digit growth in operating profit from FY23 to FY25. In contrast to this subdued trend in key numbers, a trailing valuation of 30.5x means that whatever opportunities can be loaded into the generative AI buzz and the stock’s outlook, it could be met with disappointment. This reflects the rising expectations of investors with high expectations.
Second, the stock is already up 10% since the first quarter results, suggesting that a higher outlook for this year is already priced in.
Green bud?
Management comments suggest that the long-term slump in the financial services sector (27% of revenue) may have bottomed out, but mixed data on the U.S. economy suggests that interest rate cuts in the U.S. Given what is going on, it may be premature to be optimistic here. For example, Daniel Pinto, president of JPMorgan, the world’s largest bank, pointed out at a recent event how interest rate cuts would negatively impact the company’s revenue and profits. The impact on the economy, interest rate cuts and financial sector remains uncertain. This uncertainty will continue to be a major challenge for IT services companies.
Amid these factors, the risk-reward remains unattractive to investors, with Infosys trading near the peak of its valuation range over the past decade, while CC revenue growth remains slow and within historical range. is at the lower limit of
