On July 21, shares of Infosys, a major player in the information technology sector, experienced a steep decline of 10 percent in early trade. The sharp drop was a result of the company’s decision to slash its revenue guidance for the fiscal year 2023-24 (FY24). Furthermore, the company’s net profit for the April-June quarter failed to meet market expectations, adding to the negative sentiment.
The unexpected reduction in revenue growth guidance for FY24 was a significant blow to investor confidence. Infosys revised its growth projection to 1-3.5 percent, down from the earlier estimate of 4-7 percent, citing the challenging macroeconomic environment as the reason behind the cut.
The weak quarterly performance and the reduced growth outlook led some brokerages, including Macquarie and Nomura, to downgrade Infosys. Macquarie downgraded the stock to ‘underperform,’ expressing disappointment with the company’s deal wins in Q1 and expressing skepticism about the $2 billion framework deal being a ‘mega deal.’ Nomura, on the other hand, downgraded Infosys to ‘reduce’ and reduced its target price for the stock, while also lowering its FY24-25 EPS estimates to factor in the weak Q1 earnings.
Several other brokerages, including Jefferies, Bank of America Securities, Motilal Oswal Financial Services, Nuvama Institutional Equities, and HSBC, also lowered their FY24/FY25 EPS estimates for Infosys in the range of 2-6 percent.
While some brokerages see limited risk of further earnings cuts for Infosys, they also acknowledge the challenging sectoral conditions that led to the guidance cut. JPMorgan, however, views the sharp guidance cut as a dose of realism and believes it should impact Infosys’s valuation in the short-to-medium term. Similarly, Motilal Oswal Financial Services expects the FY24 guidance reset to have an adverse impact on the stock’s near-term view.
Despite the challenges, some brokerages, including MOFSL, retain their long-term positive stance on Infosys, expecting it to be a key beneficiary of the acceleration in IT spending in the medium term. Nevertheless, the company’s unexpected guidance cut and subdued quarterly performance have raised concerns among investors and analysts, leading to the downward pressure on the stock’s value in the market.