Infosys upbeat on deals, cautious on growth as competition intensifies

Listen to this article in summarized format

The operating margin (Ebit margin) at 21% remained in the guided band of 20-22% and stayed flat year-on-year while showing a tad 10 basis point weakness sequentially.

Despite winning a mega deal during the quarter, it reduced the revenue guidance band for the full year, citing increasing competitive intensity and persistent weakness in some of the business verticals.

Infosys recorded second best sequential revenue growth for the September quarter in reported as well as constant currency terms following HCL Technologies, the third largest software exporter. That helped in maintaining its lead over Tata Consultancy Services (TCS), the largest among them and Wipro, the fourth largest, in terms of trailing 12-month (TTM) growth. Moreover, it bagged a mega transformation deal worth $2 billion, taking the total contract value (TCV) to $5.2 billion for the quarter, the highest since the September 2023 quarter when its TCV reached $7.7 billion.

The operating margin (Ebit margin) at 21% remained in the guided band of 20-22% and stayed flat year-on-year while showing a tad 10 basis point weakness sequentially. A large order win and steady top line and margin performance should have typically resulted in an upward revision in the revenue guidance. On the contrary, the company cut the FY27 guidance to 1-2% growth from the previous guidance of 1.5-3% growth. This was well below the expectations of analysts who had anticipated a more benign cut in the guidance.

Among verticals, financial services, energy and utilities, and communications, which together contribute over half to the revenue, reported 2-7% year-on-year growth while manufacturing, retail, and Hi Tech, which form one-third of the revenue, reported weakness.

The sharp jump in the stock price recently has raised the P/E multiple to 15.2 from around 13 two weeks ago though it remains well below the five-year average multiple of over 21. Given the expectations of a weaker top line trajectory for the remainder of the year, the valuation may remain under pressure in the short term.