Infosys - Weakest 4Q since GFC; guidance suggests worst is behind

Infosys’ 4Q results fell significantly short of expectations with revenue growth declining 3.2% versus expectations of 0.5% growth in CC QoQ terms. Change in the market environment, especially in the US, led to clients’ unplanned project ramp-downs and slower decision-making. Moreover, the company encountered a one-time revenue impact. It missed expectations on all other parameters as well, 

  1. 4Q EBIT margin came in at 21% versus expectations of 22%; 
  2. Deal wins of USD 2.1 bn versus expectations of USD 2.6 bn; 
  3. Margin guidance was missed by 100 bps at 20%–22%, and 
  4. Headcount declined by 1% versus expectations of marginal addition.

Investment Summary

The results were significantly lower than expected, but guidance suggests a strong pick-up in coming quarters. However, a negative 4Q exit rate led to 240 bps cut in our growth assumption; we now forecast FY24 CC organic revenue growth of 5.5% versus 7.9% earlier. We cut EPS for FY24/ 25e by 6%–7% as we reduce our margin assumption on the back of a miss on margin guidance and 4Q revenue. We value Infosys at 21x forward PE (versus 22x earlier) on FY25E EPS, which is at 10% discount to TCS’ forward valuation multiple as earnings volatility remains higher compared to TCS. We cut our TP on Infosys to INR 1,500 (from INR 1,750) but maintain BUY rating.