The disappointing Infosys results ideally should not be a shocker, given the fact that there were adequate forewarnings.  The first is the declining headcount trend. By the end of 3Q, Infosys’ headcount had declined by 6 per cent Y-o-Y.  If companies see a  turnaround on the horizon, they will not be reducing headcount, given they will have to scramble and spend more to hire again to meet demand when the recovery happens. When shares rallied following 3Q results, bl.portfolio in the edition dated January 14, had pointed out why the ‘IT stocks rally may be on wobbly legs’, given the historical strong correlation between headcount trends and business trends for IT companies. Another forewarning was industry leader - Accenture’s guide down in March. At that time, Accenture CEO, while referring to client spending, noted how one banker had remarked that ‘corporates had put themselves on a diet, given the macro (uncertainty).’

Thus, while one must have been prepared for Infosys’ poor 4Q show and sub-par FY25 outlook, what is disappointing is how expectations and results have not matched for almost 5 quarters in a row. Is it a case of investors and analysts not learning, or is it a case of Infosys faltering? With the company missing consensus expectations or guiding down in four of the last five quarters, the jury is out on that.

What should investors do?

At bl.portfolio, we gave book profit in Infosys in our edition dated June 5, 2021, when the stock was trading at ₹1,385. Over the last three years, in all our subsequent results analysis on the stock, we recommended that investors continue to avoid it. Since our book profit recommendation, the stock returns have been flat, while the Nifty 50 is up by 40 per cent. This underperformance also reflects a significant time-wise correction that has played out in the stock.

Can it be considered for investing now? Not yet in our view, given the lackluster constant currency (CC) FY25 revenue growth outlook of a mere 1-3 per cent, following an already poor FY24 in which CC revenue grew just 1.4 per cent. Operating margins too are not expected to improve with FY25 guidance mid-point at 21 per cent versus 20.7 per cent in FY24.  With such anemic growth, it is hard to justify company’s current valuation with trailing PE at 22.5 times. Last five years EPS CAGR is now at 12 per cent, not much different from pre-covid periods. In our view, the risk-reward is not favourable to invest, till valuation nears its pre-covid five year average trailing PE of 18.3 times.         

If you are still hoping for a turnaround soon, here is another data point to consider – headcount has declined by 7.5 percent Y-o-Y at the end of March.