Infosys reported marginally better-than-expected results with revenue coming in 1 per cent above consensus (Bloomberg), inline operating income and a 2 per cent beat on EPS. It also marginally increased its FY23 revenue outlook reflecting the beat in Q3, while maintaining operating margin outlook at 21-22 per cent.

Operating metrics were also good with Y-o-Y constant currency (CC) revenue growth of 13.7 per cent, and good growth in its key geographies  - North America (62 per cent of revenue)  and Europe (26 per cent of revenue). Deal momentum was quite good with company reporting a better trend than witnessed in recent quarters, despite slowdown concerns. Another positive was the decline in annualised attrition to 24.3 per cent (27.1 per cent in SepQ).

What should investors do?

However, the above positives apart, few things worth noting from the results were the slower CC growth (Y-o-Y) of 5.5 per cent (12 per cent in September quarter) in its BFSI segment which accounts for 30 per cent of revenues . Further, while Infosys has grown faster in last two years as compared to TCS, the gap appears to be shrinking now with Dec Q cc growth at 13.7 per cent, not too different from TCS’ 13.5 per cent (In September quarter, Infosys reported 18.8 per cent versus TCS’ 15.4 per cent).  A key justification of Infosys stock outperformance amongst the big 4 IT players, was its leading growth. A case can now be made that this outperformance versus TCS has shrunk in Q3  (although base effect is also a factor).

Given this, a key missing data point for investors is how exactly FY24 is going to play out for Infosys. Infosys found favour amongst investors from Covid lows due to its superior performance, but with that lead shrinking in Q3 and TCS consistently reporting better margins, Infosys needs to grow faster in FY24 as well to justify better prospects for the stock.

Other than general management comments on some delays in decision making in few verticals, not much can be gauged on growth till company gives FY24 guidance in April. However, fundamentally based on historical data, a slowdown in the Western world will most likely impact Indian IT services. Major players in the cloud computing segment like Salesforce, Amazon and Microsoft are indicating a slowdown in business, clearly implying tech companies are not immune to slowdown.

With Infosys trading at 23 times one-year forward EPS (13 per cent discount versus TCS) amidst lack of clarity on FY24 performance, risk-reward is not favourable. Company’s FY18-23 EPS CAGR is 11 per cent. It is hard to justify a 23 times PE for low double-digit earnings growth amidst uncertainties and when interest rates are rising. Investors can wait and watch for now.