Infosys Q2 Results Preview: Navigating Challenges and Charting a Strategic Course

The tech world's gaze is firmly fixed on IT major Infosys as it gears up to announce its second-quarter results on October 12. 

Beyond the financial figures, the company's Board is also set to discuss the possibility of declaring an interim dividend for FY24. In this blog, we'll delve into what's at stake for Infosys and the factors that have shaped its outlook.

Challenges in FY24

In the first quarter, Infosys presented a cautious revenue growth forecast of just 1-3% (CC terms) for FY24. This is a significant departure from the robust 14-16% growth it achieved in FY23. 

The lowered expectations are primarily attributed to the prevailing macroeconomic uncertainties. The ongoing global economic landscape has left many businesses hesitant to commit to large-scale IT projects, causing clients to cut back on spending. This hesitation has had a noticeable impact on Infosys' revenue.

Operating Margins

Alongside the conservative revenue forecast, Infosys also predicted that operating margins would hover in the range of 21-23% in FY24. 

This margin stability is expected to be driven by increased offshoring and a more diverse service mix. While this approach can support profitability, it's worth noting that higher onsite expenses have exerted pressure on operating margins, necessitating a strategic adjustment.

Q1 Performance

Infosys reported a 11% YoY growth in net profit, totaling Rs 5,945 crore for the quarter ending in June. 

However, this growth occurred against a backdrop of clients reevaluating their spending priorities and delaying decisions on future projects due to the challenging economic environment. 

On the revenue front, the June quarter witnessed a 10% YoY increase to Rs 37,933 crore. However, in constant currency terms, the revenue grew by a modest 1% quarter-on-quarter.

Strategic Outlook

To navigate the turbulent waters of FY24, Infosys has outlined several key strategies. These include a steadfast focus on strategic clients to provide long-term and sustainable growth. 

The company is also doubling down on research and innovation, aiming to enhance its competitive edge in the ever-evolving tech landscape. Furthermore, Infosys intends to continue expanding its global footprint, ensuring it remains well-positioned to tap into emerging opportunities.

Market Sentiment

As the announcement date approaches, market analysts have been weighing in on Infosys' prospects.

Axis Securities, for instance, has assigned a "SELL" rating on the stock. They arrived at a target price of Rs 1,300 by applying a 20x P/E multiple to Infosys' FY25E earnings of Rs 63.7 per share. This implies a downside of 13% from the current stock levels.

The upcoming second-quarter results and the prospect of an interim dividend declaration for FY24 will be closely watched by investors and industry observers alike. 

Infosys, like many others in the IT sector, faces a challenging fiscal year due to macroeconomic uncertainties. 

However, the company's strategic initiatives and its ability to adapt to changing conditions will ultimately determine its trajectory. As Infosys charts its course, it serves as a reflection of the broader tech industry's resilience in the face of adversity.