IGI Logo

Guidance upgrade a dampener

Discretionary spend enthusiasm currently restricted to US banks

* Infosys (INFO) reported 2QFY25 revenue of USD4.9b, growth of 3.1% QoQ/3.3% YoY CC vs. our estimate of 3.0% QoQ CC. EBIT margins stood at 21.1% vs. our estimates of 20.3%. EBIT grew 4.4% QoQ/4.5% YoY to INR86b (est. INR83b). PAT came in at INR65b, up 2.2% QoQ/4.7% YoY, in line with our estimate of INR66b. FY25 revenue growth guidance upgraded from 3-4% to 3.75%-4.5%. For 1HFY25, revenue/EBIT/PAT grew 4.4%/4.8%/5.9% compared to 1HFY24. We expect revenue/EBIT/PAT to grow by 8.1%/8.8%/10.4% YoY in 2HFY25. INFO reported a deal TCV of USD2.4b, down 41.5% QoQ and 68.8% YoY

Our view: Growth front-ended, 2H to be slower

* Despite broad-based revenue growth this quarter, INFO’s commentary and guidance dampened expectations of a significant rebound in discretionary spending.

* INFO observed limited signs of recovery in discretionary expenditures, particularly outside the US banking sector. Additionally, the company deferred its wage hikes to 4QFY25 and 1QFY26, signaling the persistent uncertainties.

* Guidance: The guidance was upgraded by just 50bp at the top end despite a strong 3.5% CQGR in 1H, implying a muted CQGR of ~0.5% over 2HFY25. This indicates that despite client pessimism bottoming out, a lift-off in discretionary spends still eludes us.

* We argued the same in our Sep’24 thematic report (Technology: Bounceback! Charting the path to revival for IT services); we believe recovery will be gradual and restricted to pockets such as US banking, healthcare, and manufacturing, and projects around ERP modernization and data will shoulder most of the growth burden.

* We were enthused, however, by the double digit YoY growth rate in small deals (less than USD50m TCV). The company was cautious in calling this out as a trend, but we believe these are the early signs of flow business returning to the company and the sector, positioning it well for FY26E

Valuation and change in estimates

* We have marginally tweaked our estimates for FY25/FY26/FY27E, driven by the slightly slower revenue growth build-out for the near term. Nonetheless, INFO has maintained its margin guidance of 20-22%, which we view as encouraging. We expect INFO to be a key beneficiary of the acceleration in IT spends in the medium term. We value INFO at 28x Sep’26 EPS. This yields a rounded TP of INR2,200, implying a 12% upside. We reiterate our BUY rating.

Revenues in line; margins & guidance upgrade below estimates

* USD revenue grew 3.8% QoQ to USD4.9b. In CC, it was up 3.1% QoQ, in line with our estimate of 3.0% QoQ.

* FY25 CC revenue growth guidance upgrade was below our expectations: FY25 revenue growth guidance upgraded from 3-4% to 3.75-4.5% (expectation: 4-5%)

* Growth was broad-based: BFSI up 2.7% QoQ, whereas manufacturing was up ~6% QoQ (organic); hi-tech, communications, and energy grew as well. Retail was flat QoQ.

* EBIT margin was flat at 21.1% vs. our estimates of 20.3%. Employee count was up 1% QoQ.

* EBIT margin guidance was maintained in the 20-22% range.

* Large deal TCV stood at USD2.4b vs. USD4.1b in 1Q, down 41.5% QoQ. The book-to-bill ratio was 0.5x.

* LTM attrition was up 20bp QoQ at 12.9%. Utilization rose 60bp QoQ to 85.9% (ex-trainees).

*  Adj. net profit grew 2% QoQ to INR65.1b, in-line with our estimate

Key highlights from the management commentary

* Clients continue to prioritize cost takeout over discretionary spend.

* INFO experienced growth across all major geographies and verticals. It is experiencing strong traction in cost efficiency and consolidation deals.

* Increased small deals (below USD50m) showed double-digit growth, representing green shoots in discretionary spend, and are broad-based across verticals. 3Q pipeline has increased with win rate expected to remain stable, aiding in deal closures and revenue generation.

* Revenue growth guidance was revised from 3.75% to 4.5%. H2 will be impacted by seasonality due to furloughs and fewer working days, but this has been factored into the guidance.

* Furloughs are expected to remain at regular levels. The pricing environment has been stable. Project Maximus and value-based selling have begun delivering benefits, with a significant delta between revenue and volume growth driven by pricing.

* In BFSI, growth was observed in capital markets, cards, payments, and mortgages with an uptick in discretionary spend.

* Large deals are focused on cost optimization, with some productivity elements driven by AI.

Valuation and view

* We have marginally tweaked our estimates for FY25/FY26/FY27E, driven by the slightly slower revenue growth build-out for the near term. Nonetheless, INFO has maintained its margin guidance of 20-22%, which we view as encouraging. We expect INFO to be a key beneficiary of the acceleration in IT spends in the medium term. We value INFO at 28x Sep’26 EPS. This yields a rounded TP of INR2,200, implying a 12% upside. We reiterate our BUY rating.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412