Infosys' Strong Q3 Earnings Boosts Optimism Among Brokerages

resr 5paisa Research Team

Last Updated: 17th January 2025 - 01:42 pm

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Brokerages remain optimistic about Infosys, driven by its strong performance in the October-December quarter, which outperformed expectations despite being a typically weak period. In addition to surpassing earnings forecasts, Infosys raised its FY25 revenue growth guidance for the eighth time in nine quarters.

Following the release of its Q4 results after Indian market hours on January 16, Infosys' share price declined over 1% to ₹1,928.45 on the NSE.

Brokerage firm Bernstein praised the company's robust performance across revenue, margins, and earnings in Q3, calling it the best earnings report of the season so far. The firm attributed this success to a rebound in discretionary spending and reaffirmed its ‘outperform’ rating with a target price of ₹2,330, citing a positive outlook for large-cap IT services.

Similarly, Nomura reiterated Infosys as its top pick among India’s large-cap IT firms, supported by its strong overall performance and improved FY25 guidance. Nomura maintained a ‘buy’ rating with a target price of ₹2,220.

HSBC also pointed to early signs of recovery in Europe’s banking sector and US retail as positive indicators for Infosys’ growth. The brokerage upheld its ‘buy’ rating, setting a target price of ₹2,120.

In Q3, Infosys secured a large deal Total Contract Value (TCV) of $2.5 billion, with 63% being net new, slightly exceeding the previous quarter’s $2.4 billion despite seasonal challenges. CEO Salil Parekh expressed confidence in the company’s improved deal pipeline, which led to an upward revision of its FY25 revenue growth forecast to 4.5-5% in constant currency terms, compared to the previous 3.75-4.5% range.

Morgan Stanley also expressed optimism, citing stronger deal wins and positive management commentary on discretionary spending. It highlighted net headcount additions as a signal of potential revenue growth acceleration and noted Infosys’ strong free cash flow to net income ratio in recent years. The brokerage retained its ‘overweight’ rating with a target price of ₹2,150.

However, Jefferies cautioned that while the FY25 revenue guidance was revised upward due to the Q3 performance, an unchanged ask rate for Q4 suggests potential seasonal weakness. BoFA Securities projected a 1% sequential revenue decline in Q4, potentially due to a drop in third-party contributions or conservative management guidance.

During the post-earnings call, Infosys management acknowledged the possibility of a softer Q4, citing factors such as reduced third-party revenue from Q3, furlough impacts, and fewer working days. However, they assured that these headwinds were already factored into the FY25 guidance.

Despite strong Q3 results, concerns over a potential Q4 decline contributed to a nearly 6% drop in Infosys’ American Depository Receipts (ADRs) on the New York Stock Exchange (NYSE) on January 16.

This could lead to a weaker opening for Infosys shares in India today, reflecting the ADR movement. However, Morgan Stanley noted that the stock might find support at its five-year average two-year forward free cash flow multiple, potentially limiting downside risks.

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