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Guidance implies a revenue dip in Q4

Infosys’ (INFO IN) Q3 performance was better than our expectations, both on revenue and margin fronts, as recovery was visible in the BFS sector. Deal wins were stable – Large deal wins came in at USD 2.5bn. Based on strong 9M performance and robust deal wins, INFO increased its revenue guidance for FY25 to 4.5% (5% now in CC), which implies a 0.8-2.5% QoQ drop in Q4E revenues in CC to reach the lower/ higher end of the annual growth guidance. Q4FY25 and Q1FY26 may witness a drag on margins due to wage hikes. So, recovery for INFO hinges on the North American market and BFS (which have been showing signs of improvement). A sustained recovery is needed in these markets for us to turn constructive on INFO. Valuations appear full – Recommend Reduce.

North America muted; BFSI-led growth: INFO’s revenue grew 0.9% QoQ/5.9% YoY in USD terms and 1.7% QoQ/6.1% YoY in CC. INR revenue growth was 0.9% QoQ/5.9% YoY. Q3 growth was driven by the North American market, up 2.7% QoQ and 4.8% YoY. Europe market (30% of the revenue mix) has seen some weaknesses after a few quarters of growth (it grew only 0.9% QoQ versus 8.9% in Q2). India (though a small market with 2.9% mix) reported a 5.6% QoQ decline and RoW an 8.2% QoQ growth. Revenue from BFSI grew 3.1% QoQ in Q3 and Manufacturing was weak (down 0.4% QoQ). Retail grew 4.7% QoQ. Large deal TCV came in at USD 2.5bn, up 4% QoQ (down 22% YoY). LTM attrition was up 80bps QoQ to 13.7% – INFO added 5.6K headcount in Q3.

Margins improved 20bps QoQ: EBIT margins in Q3 rose 20bps QoQ to 21.3%. There was a 70bps impact on margin due to furlough in Q3. Tailwinds were: 1) a 40bps currency benefit, 2) 30bps margin expansion due to Project Maximus and 3) an additional benefit of 20bps in Q3. INFO rolled out wage hikes in two tranches, effective from 1 January 2025 and effective from 1 April 2026 for some employees. Margins may be impacted in these two quarters, especially in Q4 when revenue may drop

Recommend Reduce with TP pared to INR 1,830: INFO increased its FY25 guidance by 50bps at the higher end and 75bps at the lower end. This suggests that recovery is still away in the medium term. North America market has shown some improvement in Q3, but we need to see sustained long-term growth here. Large deal wins were steady in Q3 but annual guidance suggests that there would be dip in revenues in Q4 due to continued furlough impact. Despite a rise in revenue guidance, no change in the margin band suggests incremental cost pressure, especially for employees with AI skillset (comes at a premium pay scale)

We recommend Reduce with TP pared to INR 1,830 (from INR 1880), led by 1.5% and 3% reduction in earnings. Our TP is based on 24x FY27E EPS of INR 75.9. Key upside risks are better-than-expected revenue growth and sustained margin expansion. The attrition has risen for the company and we believe that the company may need to incur incremental costs without compromising on the demand fulfillment. The stock is trading at 27x and 25x on FY26E/FY27E , > 50% premium to pre-covid valuations.

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