Infosys Earnings: Clients Cut Discretionary Projects Amid Macro Headwinds; Lowering Our Fair Value

Narrow-moat Infosys INFY reported first-quarter earnings below our expectations. Management offered a grimmer outlook for 2024 revenue growth, citing clients’ revision of discretionary spending and delayed megadeal closings. Despite clients’ continued willingness to collaborate with Infosys on cost- and efficiency-improvement programs, we are lowering our fair value estimate from $17 to $16 per share after baking in a weaker near term. After the announcement, shares dropped over 9% to $16 per share, leaving the stocks trading in fair-value territory, in our view.

First-quarter revenue grew by 4.2% year over year in constant currency, the least amount in more than two years. Infosys’ deceleration in revenue growth mainly came from clients’ reassessment of projects due to a soft macroeconomic environment. We believe the weak performance is temporary, as strong interest in long-term digital transformation remains. Nonetheless, we are bracing for more weakness ahead—hence our fair value estimate cut. Still, the quarter had bright spots. We are encouraged to see that Infosys’ European business grew at nearly 11% year over year in U.S. dollars, indicating Europe’s increasing comfort with offshore IT. Infosys’ operating margin increased 80 basis points year over year to 20.8%. Management has launched a comprehensive two-year margin expansion program, and we are confident that this initiative will help Infosys benefit from a cost advantage similar to peer companies such as TCS.

Management adjusted the revenue outlook for fiscal-year 2024 to between 1% and 3.5% year over year in constant currency from between 4% and 7% year over year in constant currency previously. Softer-than-expected first-quarter performance informed the outlook moderation. Operating margins forecast remained the same at between 20% and 22%, and Infosys’ management expected the margin expansion program to further increase operating margin in the long term.