Infosys Q2 Earnings Miss Sends Shares Plummeting 5% as Investors React to Cautious Guidance

Infosys’ financial results for the September quarter (Q2FY25) didn’t meet market expectations, causing its stock price to drop nearly 5% on Friday. Despite showing 3.1% constant currency (CC) revenue growth—better than analysts predicted—investors were disappointed by the cautious outlook from management.

Revenue Growth and Guidance Update

Infosys raised its FY25 CC revenue growth forecast from 3-4% to 3.75%-4.5%, but the tone was cautious, particularly concerning discretionary IT spending. While there’s some recovery in key sectors, discretionary spending, especially outside the US banking industry, remains sluggish.

Contract Wins and Margins

The company won 21 large deals in Q2FY25, but their total contract value dropped 42% sequentially and 69% compared to last year. This indicates that most of the deals focus on cost-saving measures rather than new growth initiatives.

Deferred Wage Hikes and Margin Pressures

Infosys has deferred wage hikes for FY25, with increments planned for January and April 2025. Its EBIT margin remained flat at 21.1%, missing expectations of sequential growth due to higher amortization costs from acquisitions.

Future Outlook

Although Infosys has performed better than the Nifty IT index with a 22% return in 2024, the anticipated recovery in discretionary IT spending is still uncertain, leaving investors concerned. Despite this, Infosys could benefit significantly when the recovery begins, though its current valuation remains high, offering limited comfort.

The stock is trading at a price-to-earnings ratio similar to Tata Consultancy Services (TCS), indicating strong expectations but also posing risks for the future if growth doesn’t meet forecasts.

Conclusion

Overall, while Infosys shows signs of potential growth, the lack of immediate recovery in spending and the cautious guidance have made investors wary, contributing to the recent drop in stock prices.