Infosys Disappoints on Q1 Earnings, Raises FY23 Revenue Guidance; Should you invest?

Infosys stock price today: Infosys’ stock price fell on Monday morning as investors reacted to weak growth in the company’s net profit. Infosys on Sunday evening informed exchanges that its net profit rose just 3.1% on an annual basis in the April-June quarter, missing estimates pinned down by Dalal Street analysts. India’s second-largest IT company reported consolidated revenue of Rs 34,470 crore in the first quarter, which was higher than analysts’ estimate of Rs 34,150 crore. On an annual basis, revenues jumped 23.6%.

Infosys had raised its earnings forecast on the earnings call after the latest results, which failed to lift the spirits of brokerages as a whole, as their target price suggests upside potential of 2 to 16% of the title.

“Infosys delivered a moderate performance in 1QFY23 with an EBIT margin of 20.1%, 163 basis points below our estimate of 20.7%,” said Mitul Shah, head of research at Reliance Securities. Analysts, however, remain bullish on the information technology giant, reiterating their calls to buy. Infosys raised its revenue forecast.

Additionally, ICICI Securities believes Infosys’ results suggest a normalization in demand for the IT sector. “While the upgrade to the revenue forecast from 13-15% CC YOY to 14-16% (implying a CQGR of 1.6-2.6% in CC terms) indicates healthy near-term demand, management’s comments on pockets of weakness in certain segments such as mortgage, BFSI weakness over the past two quarters and declining TCV gains, point to a normalization in demand,” they said. “We We are confident that Infosys is well positioned to gain market share and is suitably equipped for industry-leading growth.However, high margin pressures as well as slowing TCV momentum in tandem with the weak macroeconomic environment lead us to maintain our HOLD rating,” the analysts added.The target price has been revised down to Rs 1,434 per share.

Morgan Stanley remains overweight equities with a target price of Rs 1,535 on the stock. According to Morgan Stanley, a weak margin outlook would offset higher growth expectations. Moreover, the increase in revenue forecasts is comforting but not sufficient. “We expect the stock to remain under pressure in the near term.”

Kotak Securities analysts are bullish on the stock and draw two key takeaways from the April-June results. “The lower EBIT margin was not a surprise; however, the decline in manufacturing vertical margins has been, and weak TCV indicates a slowdown but is already part of our estimates,” they said. Kotak Securities cut FY2023-25E EPS by 2-4% and fair value to Rs 1,690, valuing the stock at ~25X FY2024E EPS. “Maintain BUY – we believe Infosys will continue to lead growth and with improved margins going forward,” the brokerage firm said in a report.

Constant currency (CC) revenue grew 21.4% year-on-year, while on a sequential basis, CC revenue growth was 5.5%. The company’s revenue from digital activities, which accounted for 61% of total revenue, increased 37.5% year-on-year in terms of CC.

CLSA has a buy rating on the stock with a target of Rs 1,750 per share. “Good demand momentum and cost challenges are likely to be transitory, while strong headcount expansion and higher revenue growth expectations provide reassurance of demand strength. The company now expects margin below its range of 21-23%. We view the shortfall as optical due to transitory factors,” he added.

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