The information technology (IT) sector’s revival is long overdue, but brokerages are now highlighting signs of recovery, particularly in discretionary spending for top IT companies, with Infosys being their best bet.
The company's stock price, however, saw heavy profit-booking, dropping 5.89 per cent to Rs 1,812.70 per share on the BSE in Friday's intraday trade. This follows a fall in the US-listed shares of the IT services giant that plunged 6 per cent overnight.
This came despite Infosys posting better-than-expected results for the third quarter of the current financial year (Q3FY25). It posted an 11.4 per cent year-on-year (Y-o-Y) increase in net profit to Rs 6,806 crore for Q3FY25, surpassing Bloomberg's consensus estimate of Rs 6,773 crore. On a sequential basis, its net profit rose 4.6 per cent.
Revenue for the quarter grew 7.6 per cent Y-o-Y to Rs 41,764 crore, exceeding the Bloomberg consensus estimate of Rs 41,353 crore. Sequentially, revenue increased by 1.9 per cent, driven by sustained client spending.
The operating margin for the quarter stood at 21.3 per cent, up 0.8 per cent Y-o-Y and 0.2 per cent sequentially.
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Meanwhile, the company’s net headcount grew for a second successive quarter by 5,000 while attrition stayed low at 13.7 per cent.
Short term headwinds
Analysts at Motilal Oswal maintained that discretionary recovery for Infosys is not yet broad-based. The revenue growth in Q3 was largely driven by high pass-through revenues, raising concerns over the sustainability of growth. They expect these revenues to unwind in Q4FY25, leading to a modest 1 per cent quarter-on-quarter (Q-o-Q) decline at the upper end of FY25 guidance. "Pass-through revenues, a byproduct of the ‘cost-takeout’ phase and common in large deals, are expected to create headwinds for growth in FY26, particularly for largecap companies like Infosys and TCS," said Motilal Oswal.
The IT major’s total contract value (TCV) for the quarter stood at $2.5 billion, up 3 per cent Q-o-Q, and it was down 23 per cent Y-o-Y, remaining soft for a second consecutive quarter, with 63 per cent net new deals.
Moreover, wage hikes, phased over Q4FY25 and Q1FY26, are expected to create headwinds and impact margins, analysts said.
Analysts at Nuvama Institutional Equities highlighted a revival in discretionary spending for Infosys in BFSI (banking, financial services, and insurance), which grew by 3.1 per cent Q-o-Q, and recovery in the retail segment driven by a strong holiday season.
However, segments like Hi-Tech — particularly telecom, manufacturing, and automotive — continued to show weakness.
Long-term tailwinds
On the upside, the company’s management upgraded its FY25 revenue guidance to 4.5-5 per cent in constant currency (CC) from 3.75–4.5 per cent while maintaining the Ebit (earnings before interest and taxes) margin guidance of 20-22 per cent.
The management further said they continued to see signs of a pickup in discretionary spends, and a recovery in the BFSI and retail verticals in the near term.
“Infosys has upgraded its guidance for three consecutive quarters, signifying improving macro and business fundamentals. We reckon Infosys shall benefit disproportionately in FY26-FY27 from a revival in discretionary spends — just like it suffered disproportionately (versus peers) in FY24-FY25,” Vibhor Singhal, Nikhil Choudhary, and Yukti Khemani of Nuvama said in a report.
Viewing it as one of the best ways to play the revival in the IT sector over the next few years, the brokerage retained “Buy” rating on the stock, with a raised target price of Rs 2,250. On similar lines, Motilal Oswal also gave a “Buy”, with a target of Rs 2,200. Analysts at Emkay Global maintained “Buy” on the stock, with a target of Rs 2,150 valued at 28 times its December-FY26E earnings per share (EPS).
Meanwhile, Bernstein maintained an “Outperform” rating on Infosys, with a target price of Rs 2,330, while HSBC continued to hold a “Buy” rating, with a target of Rs 2,120, according to reports.
Similarly, Nomura retained the “Buy” rating, with a raised target of Rs 2,220, and Morgan Stanley gave an “Outperform” rating at Rs 2,150. At close, the company’s stock price was down 5.77 per cent to Rs 1,815.10 apiece against BSE Sensex's fall of 0.55 per cent to 76,619.33.