Infosys Earnings: Tapering Our Fair Value Estimate to $17 Per Share Upon Steep, Weak Outlook

Infosys’ INFY fourth-quarter results came in under our expectations as the company experienced unforeseen winding down of client projects. While the near-term weakness is occurring throughout the industry, we were caught off guard by Infosys’ significantly lower 2024 guidance than we were expecting. While peer Tata Consultancy Services, or TCS, refrained from giving an outlook on April 12, that is the norm for the company, and we sensed overall optimism ahead with a sense of general near-term moderation rather than sharp declines. In contrast, Infosys’ outlook for the year indicates significantly steeper conservatism, which we think has weight given Infosys’ fourth-quarter performance compared with TCS. As a result, we are lowering our fair value estimate for the narrow-moat firm to $17 from $18 per share. Shares are down 8% upon results to near $16 per share, which leaves the stock fairly valued.

Fourth-quarter revenue grew 9% year over year (in constant currency) to $4.6 billion, marking deceleration. The ease on the gas that led to a miss compared with our expectations was a mix of two factors. These factors were one-time impacts as well as customers ramping down on projects, which Infosys had not foreseen. On a brighter note, Infosys’ digital revenue now makes up 62% of revenue, having grown by 26% year over year (in constant currency) in fiscal 2023. This progress helps justify moderate margin expansion we bake in over the next five years given that digital projects tend to be higher-margin ones. Infosys’ operating margin in the quarter of 21% contracted 0.5% compared with the prior-year period, largely as a result of decreased utilization (now at 80% due to softer demand). Fourth-quarter diluted EPS of $0.18 came in just below our expectations.