Infosys hits new high, ups FY25 guidance. Has Kalki arrived for the IT sector?

IT sector giant Infosys Ltd pleasantly surprised the Street with its June quarter (Q1FY24) earnings performance. Sequential revenue growth in constant currency terms stood at 3.6% last quarter, ahead of the consensus estimate of 2.3%. 

Growth was broad-based across verticals but led by the financial services and manufacturing verticals. Notably, Infosys’ financial services vertical clocked growth in Q1 after six quarters.

What stands out is Infosys revising its FY25 constant currency (CC) revenue growth guidance higher to 3-4% year-on-year from 1-3% earlier. 

“(The) guidance implies CQGR of 0.9-1.6% in the next three quarters (organic growth of 2.2% in Q2 and flat revenues in Q3 and Q4 will take Infosys to 4% growth in FY2025E),” said Kotak Institutional Equities report. CQGR is short for compound quarterly growth rate. 

The guidance upgrade was driven by the acquisition of German company In-tech and one-time revenue improvement in its India business.

Nonetheless, at a time when low revenue growth visibility has marred the sector’s earnings outlook, this development could help rekindle the lost confidence. 

The Street is already factoring in the brighter picture. Infosys announced Q1 results on Thursday post market hours. In response, Infosys’s ADR was up 8.4% on Friday. In a rub-off effect, the Wipro Ltd’s ADR also rose 2.8%. On Friday, Infosys shares hit a new 52-week high of Rs1,844 on the NSE.

The management’s commentary on growth recovery in the key market of North America and key verticals of financial services was encouraging.  While the pressure on discretionary spending persists, the deal pipeline remains strong.  

Infosys’ large deal total contract value stood at $ 4.1 billion in Q1FY25, up 79% year-on-year, with a net new deal component of around 58%. Infosys signed 34 large deals during the quarter. In the backdrop of solid deal wins, the quantum of upgrade in guidance may appear conservative. Still, it is welcome as it indicates that the worst may be behind for Infosys and the IT sector.

Analysts at Nomura Financial Advisory and Securities (India) are of the view that the earnings per share (EPS) downgrade cycle is likely to end for the sector.  In a report on 18 July, the global research house raised Infosys’ FY25-26F EPS by 2-3% to factor in higher revenues and margins.

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Meanwhile, Infosys has retained its earnings before interest and tax (Ebit) margin guidance for FY25 at 20-22%. In Q1, Ebit margin rose 100 basis points (bps) sequentially to 21.1%. Margin expansion was aided by lower sub-contracting, benefit from project ‘Maximus’ and one-offs linked to India business.

So far in 2024, the Infosys stock has fetched 16% returns, ahead of the Nifty IT index. Based on Bloomberg consensus estimates, Infosys’s shares trade at FY26 price-to-earnings multiple of 27.4 times, whereas close competitor Tata Consultancy Services Ltd (TCS) trades at a multiple of 30.5 times.

TCS reported sequential CC revenue growth of 2.2% in Q1FY25, beating the Street's estimate of 1.5%. TCS does not give quantitative revenue growth guidance but expects better performance in FY25 versus FY24. With Infosys' solid Q1, the valuation gap between the company and TCS is expected to narrow.

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