Infosys share price target 2025, IT stocks outlook post Q1

IT stocks were moving up despite posting subdued number in Q1 FY-24 until Infosys Q1 came into picture. four out of six IT stocks from benchmark Nifty50 had reported below street expectations number but still were up more than 5%. Tata Consultancy Service(TCS), HCL Tech, Wipro and new entrant in the Nifty50 IT pack LTI Mindtree(replaced merged co HDFC ltd) all posted below par Q1 numbers as continuing macro challenges in US, Europe,(largest market for Indian IT companies) but Infosys ruined the mood of market, why? Let’s find out.

Q1 FY-24 results of IT stocks

TCS started the result season for large companies on July 12, expectations were results will be mute as macro challenges, high rates, trouble in BFSI sector will keep the numbers moderate for IT services companies.

A brief on Q1 performance

Tata consultancy Service largest Indian IT company( by market cap) q1 highlights-

• Revenue at Rs 59,381 crore, +12.6% YoY
• Constant Currency revenue growth: +7% YoY
• Operating Margin at 23.2%; an expansion of 0.1% YoY
• Net Income at Rs 11,074 crore, +16.8% YoY | Net Margin at 18.6%
• Net Cash from Operations at Rs 11,353 crore ie 102.5% of Net Income
• Net headcount addition of 523 |Workforce strength: 615,318
• Dividend per share: Rs.9.00 declared
• UK leads growth in major markets clocking a growth of 16.1% followed by Middle East& Africa 15.2%, India 14%.
• Life science and Healthcare lead growth in industrial segment growing at 10.1%, BFSI growth was moderate 3%, communications and media growth was slowest at mere 0.5%
• Deal flow was solid at USD 10.2 billion.

HCL Tech q1 major highlights

• Revenue of ₹26,296 crore, up 12.1% YoY but down 1.2% QoQ
• Constant Currency(CC) revenue up 6.3% YoY but down 1.3% QoQ
• EBIT at ₹4460 crore, up 11.7% YoY, down 7.7% QoQ
• EBIT margin at 17%
• Net income of ₹3534 crore, up 7.6% YoY, down 11.3%, net income margin of 13.4%
• Won 18 large deals- 7 in services and 11 in software
• TCV (new deal wins) at USD 1,565 million, deal pipeline at all time high, grew 17.7% QoQ and 26.2% YoY
• Dividend of ₹10/share, 82nd consecutive quarter of dividend payout.
• The company retained its guidance of 6-8% constant currency revenue growth for FY24, and operating margin at 18-19%

Wipro Q1 major highlights

• Gross revenue at ₹23,479 crore, up 6% YoY
• Operating profit of ₹4,195 crore, up 8.7% YoY
• Net profit ₹2870 crore, up 12% YoY
• Total bookings were at USD3.7 billion and large deal bookings at USD1.2 billion, up by 9% YoY
• Company expects revenue from IT Services business segment to be in the range of $2,722 million to $2,805 million. This translates to sequential guidance of -2.0% to +1.0% in constant currency terms.
• Energy, healthcare, manufacturing and consumer business unit have provided support but BFSI and hi-tech remain a drag in terms of industry exposure.
• Company’s management expects to maintain operating margin to 16-17%

LTIM(LTI MINDTREE) Q1 highlights

LTIM recently entered benchmark NIFTY50 index replacing HDFC ltd. as later got merged with HDFC bank.

• Revenue at ₹8883 crore, growth of 0.1% QoQ and 13.8% YoY.
• Operating profit at ₹1635 crore, growth of 9.5% yoy
• Net profit at 1151 crore, up 4.2% yoy
• EBIT margin of 16.7% while PAT margin of 13.2%
• Continuous growth in order inflow, reached $1.41 billion in Q1FY24 near record high.
• North America provides 73% of revenue followed by Europe and rest of the world.
• Guidance of 17-18% EBIT margin by the exit quarter of FY24

Infosys Q1 highlights

• Revenue at ₹37,933 crore up by 10% YoY
• Operating profit of ₹9064 crore up by 15.3% YoY
• Operating margin at 20.8%, growth of 0.7% YoY but decline of 0.2% QoQ
• Net profit 5945 crore, a growth of 10.9% YoY but declined QoQ
• In the June quarter, Infosys bagged large deals worth $2.3 billion, a tad higher than $2.1 billion worth of deals won in the March quarter.
• The 12-month trailing attrition rate was down to 17.3% in the first quarter, from 20.9% a quarter ago.
• Financial service largest vertical for Infosys, saw a 4.7% decline in revenue, telecommunication vertical reported 6.1% de-growth in revenue this quarter
• Manufacturing and life science posted double digit growth this quarter
• Geography wise North America registered a mere growth of 2.3%YoY while Europe reported 11% growth
• Infosys reduced revenue growth guidance sharply to 1-3.5% from 4-7% for FY-24 in constant currency term, though it retained it’s operating margin guidance 20-22% for FY-24.

Management commentary

Broadly all IT companies presented similar commentary post Q1 result, Top management of these companies presented their view on overall sector and their company sailing through in this tough macro time. They pointed out how inflation challenges in developed economies and higher interest cost is making clients to cut on discretionary spending, prioritizing projects, taking longer to place order keeping high ROI on project in mind.

Though they see challenges remaining in Q2 of FY24 but things improving from H2 of FY24 as early Green shoots are visible. Easing inflation numbers, a pause in rate hikes and chance of rate cuts in coming months, growing need of having robust IT system for companies are pointing out toward good time ahead making companies are cautiously optimistic. All of the top IT companies maintained their growth guidance and margin guidance except Infosys which reduced it’s revenue growth guidance in constant currency term to 1-3.5% from 4-7% given earlier.

Infosys trouble and what ruined the mood of market on IT stocks

IT companies are facing the brunt of rough macros in developed market as their business is globally linked and concentrated there, from late 2021 west is clashing with stubborn inflation in which Russia-Ukraine war acted as fuel in fire, as a remedial action central banks around the globe rose interest rates to multi year high. These challenges impacted BFSI sector badly and large chunk of revenue of Indian IT companies is from same BFSI sector.

Keeping all this in mind expectations of market from all these IT companies were of tepid growth in topline and flat margin, all eyes were on management commentary and guidance which would provide insights and views of management on evolving macro conditions and assessment of order flow. TCS, HCL Tech, Wipro and LTI Mindtree management was hopeful of things improving going forward, they expected order pipeline to remain strong as they see bottlenecks opening going forward. They maintained the revenue growth guidance and operating margin guidance for upcoming quarters.

This completely changed the view of market on IT stocks supported by reports from foreign researchers on increasing IT spending specially in BFSI sector going ahead. Despite tepid results from above mentioned IT stocks they were performing well, TCS, HCL Tech, Wipro, LTIM rose 5-10% post result but Infosys numbers ruined the mood of market on IT stocks. But why?

Why market was so upset with Infosys numbers that stock tumbled 10% intraday

Infosys numbers were OK as expectations were of mild growth but what disappointed the market was guidance cut and deal pipeline. Infosys sharply slashed its revenue growth guidance in constant currency terms to 1-3.5% from 4-7% earlier. Infosys informed the exchanges of of $2 billion mega deal but analysts suggest it isn’t a mega deal as claimed by company as the deal is just a estimation by management and not committed by client. Analysts also expect Infosys to lag Peers in deal wins going forward.

Who to blame?

Past Q4 of FY- 23 Infosys was favorite among IT stocks for D-street and was among least corrected as “promise less deliver more” was perfectly working for Infy past Q4 but numbers of Q4 came as a shock for market as expectations were on high that time. From April 2023 stock of Infy took a beating and corrected to 52-week low of 1120 from almost 1700 level. Experts blamed management for not assessing the situation accurately and not warning the market before hand of tough situations company is facing.

After Q4-FY23 Infy did the same by shocking the market through a sharp revenue growth guidance cut though it maintained operating margin guidance. Experts from Nomura believe, The weakness in growth has magnified after Infosys cut its guidance. It is of the view that Infy will underperform industry growth in financial year 2024 and that the cut in revenue growth guidance, overshadows the in-line execution in the June quarter. The lowering of guidance also reflects the pullback in discretionary demand and slow decision-making.

The problem with IT stocks is that they trade at premium due to their fast growth and cashflow capabilities, but analysts are now divided over that if growth is mere 3-4% till 1-2 years, do they(IT stocks) deserve that premium valuation.

Gartner report on global IT spends, click here

Valuation

Conclusion

We are of the view that IT stocks trying to find bottom but may remain unstable till few more quarter, until more clarity emerge on inflation/rate-hike front. Though inflation is easing worldwide but problems still remain, situation arising from Russia-Ukraine over black sea grain deal and wheat crisis may once again trouble the world. Our view is intact about IT stocks, they are a phenomenal long term story, but there is no need to hurry or showing FOMO in buying them. They need to be accumulated in every significant dip slowly because as the saying goes, Good price and good time never come together.

More about IT stocks, click here