Infosys’ key numbers in terms of revenue and operating income/ margin were generally in line with consensus expectations. While net profit missed expectations by 4.5 per cent, investors are likely to ignore it given the impact was due to one-off/non-operating items. Results indicate weakness still exists in North America (58 per cent of revenues), while better growth in Europe made up to an extent. But, overall, not much to complain about, maybe except for large deal wins lower than expectations at $2.4 billion for the quarter, versus $4.1 billion in the previous quarter.

While the constant currency (cc) revenue growth for Q2 at 3.3 per cent, too, was in line, the company raised FY25 CC revenue growth guidance to a range of 3.75 to 4.50 per cent as compared to 3-4 per cent given at the time of Q1 results. However, it is important to note that this roughly 60 bps (at mid-point) increase in full-year revenue outlook is not much to celebrate either for two reasons.

For one, a 4.125 per cent expected revenue growth for FY25 follows a weak FY24 in which the company grew by just 1.4 per cent. This implies FY23-25 revenue CAGR of a mere 2 per cent. Add to this the fact that operating margins will be flat for two years till end of FY25 at around 21 per cent, implying low single digit growth in operating profit between FY23-25. As against such muted trends in key numbers, a trailing valuation of 30.5 times reflects heightened investor expectations that is likely to be met with disappointment, whatever the buzz on Generative AI and opportunities one can load up into the stock’s prospects.

Second, the stock is already up 10 per cent since the time of Q1 results, implying the guidance increase for the year is already baked in.

Green shoots?

While management comments indicate prolonged weakness in the financial services vertical (27 per cent of revenues) may have bottomed out, it may be too early to get optimistic here, given the mixed data points with regard to the US economy and ongoing rate cuts there. For example, in a recent event, Daniel Pinto, the president of JP Morgan -- the world’s largest bank, noted how rate cuts there would negatively impact the company’s revenues and profits. How the economy, rate cuts and impact on financial sector will pan out is still largely uncertain. This uncertainty will remain a continuing overhang for IT services companies.

Amidst these factors, the risk reward remains unattractive for investors, with Infosys trading at close to the peak of the valuation range of the last 10 years, while cc revenue growth remains muted and at the bottom end of historical range.