Infosys’ better-than-expected Q3 earnings ushers optimism among brokerages
Brokerages remain largely optimistic over Infosys on the back of the company’s earnings beat for the October-December quarter. Along with strong earnings in a seasonally weak quarter, Infosys also raised its revenue growth guidance for FY25, the eight such instance in the past nine quarters.
Brokerage firm Bernstein applauded the information technology major’s all round beat across revenue, margin and earnings in Q3, touting it as the best earnings of the season so far. Given that the IT major’s Q3 performance was driven by discretionary recovery, the brokerage continues to see an upcycle in the large-cap IT services space. On that account, Bernstein reiterated its ‘outperform’ call on Infosys, with a price target of Rs 2,330.
Echoing a similar sentiment, Nomura reiterated Infosys as its top pick in the large-cap IT services space in India, bolstered by the company’s all-round performance and guidance lift in FY25. Nomura has a ‘buy’ call on the stock with a price target of Rs 2,220.
Meanwhile, HSBC highlighted the management outlook, especially around green shoots in Europe banking and US retail as major positives for the company’s growth prospects. Likewise, HSBC also retained its ‘buy’ rating on Infosys with a target price of Rs 2,120.
Infosys reported a Q3 large deal Total Contract Value (TCV) of $2.5 billion, with 63 percent being net new, marginally surpassing the previous quarter’s $2.4 billion despite seasonal weakness. “Improved deal pipeline give us greater confidence as we look ahead,” said CEO Salil Parekh. It was the strong deal wins in Q3 that prompted the management to revise its revenue growth guidance to 4.5-5 percent in constant currency terms for FY25. The previous guidance had estimated revenue growth in the range 3.75-4.5 percent for FY25.
Morgan Stanley also turned optimistic over improving deal wins and the management’s constructive commentary on discretionary spending. “Net headcount addition drives view of reasonable acceleration in revenue growth,” the brokerage stated. Meanwhile, it also noted that free cash flow to net income for Infosys was one of the strongest in last several years. Accordingly, it retained its ‘overweight’ stance on Infosys, with a price target of Rs 2,150.
On the flipside, Jefferies noted that even though the FY25 revenue guidance has been raised to factor in Q3’s earnings beat, the ask rate for Q4 remains the same, suggesting probability of seasonal weakness in the ongoing quarter.
Taking this forward, BoFA Securities expects a 1 percent sequential revenue decline in Q4, likely due to a potential fall in third-party items or a conservative company stance.
While answering analyst queries in the post earnings call, the management also acknowledged the concerns around expectations of a weaker Q4. The company enjoyed the benefits of higher third-party revenue contribution in Q3, which aided its overall topline growth. With the reversal of those benefits in Q4, combined with slight impact of furloughs and lower working days, the January-March quarter is likely to face some headwinds which are baked in the FY25 revenue growth guidance, the management said.
Despite that, lingering concerns over a possible decline in Q4 revenues likely triggered a near 6 percent slump in the American Depository Receipts (ADRs) of Infosys, listed on the New York Stock Exchange (NYSE) on January 16.
Tracking this, shares of the IT major may also open lower in trade today, if the performance of Infosys ADRs are anything to go by. However, even in the case of a decline in Infosys share price, Morgan Stanley expects the stock to find support around its five-year average two-year forward free cash flow multiple.
Infosys had released its Q4 numbers after Indian market hours on January 16 and its shares ended over 1 percent lower at Rs 1,928.45 on the NSE.
