Infosys Ltd delivered robust Q3 results, posting an 11.4% rise in net profit to ₹6,806 crore and revising its FY25 revenue guidance upwards. However, the stock plunged 5.71% to ₹1,816.10 on the BSE, marking a significant drop despite its strong performance over the past year, where it gained 10%.
The sharp decline has raised questions about the underlying factors affecting investor sentiment, despite Infosys beating analyst expectations. Here’s a detailed look at what led to the sell-off.
Key Reasons Behind the Decline
1. Tepid Deal Wins and Uncertain Growth
While Infosys revised its FY25 revenue guidance upward, the market reacted negatively to muted large deal wins. The absence of mega deals during Q3 cast a shadow over the company’s ability to achieve double-digit growth in FY26.
- Q4 Revenue Concerns: Despite the guidance upgrade, Infosys projected a potential 2.2% to 0.2% QoQ revenue decline in constant currency (CC) terms for Q4. This was attributed to:
- Seasonality effects.
- Fewer working days in Q4.
- Reversal of third-party sales-led business seen in Q3.
2. Focus on Cost-Takeout Deals
Management highlighted that clients remain focused on cost-takeout deals rather than discretionary spending. Although there are signs of recovery in discretionary spends and improved demand in the BFSI (Banking, Financial Services, and Insurance) and retail sectors, the pace of revival remains slow.
3. ADR Performance
Infosys ADR shares also fell 5.77% overnight, reflecting similar concerns among global investors. The drop to $21.57 per share highlighted broader uncertainties about growth momentum and deal pipelines.
4. Analyst Downgrades and Cautious Stance
Despite Infosys’ strong Q3 performance, many brokerages have maintained a “Hold” rating on the stock, citing concerns over near-term revenue growth and margins.
- Sharekhan: Highlighted potential Q4 revenue declines and noted muted growth prospects for the short term.
- Antique Stock Broking: Reduced revenue and EPS estimates, reiterating a target price of ₹2,025.
- Nirmal Bang: Trimmed FY26 revenue estimates by 1% and margin forecasts by 30 basis points, reflecting weaker Q4 expectations.
Sectoral and Broader Market Impact
The tepid Q3 results and revised outlook for Infosys impacted not just its stock but also the broader IT sector. Other IT heavyweights like TCS, HCL Tech, and Wipro experienced minor declines as investor sentiment turned cautious.
Long-Term Growth Potential
While the near-term outlook for Infosys appears challenging, analysts remain cautiously optimistic about its long-term prospects.
1. Signs of Demand Revival
Antique Stock Broking noted an improvement in demand, particularly in:
- Financial Services: Discretionary spending in the US is recovering strongly.
- European Markets: Signs of revival are emerging in retail and consumer sectors.
2. FY26 and Beyond
Nirmal Bang expects FY26 to show stronger growth compared to FY25, as discretionary spending and deal pipelines improve. EPS estimates for FY27 were revised upward by 0.7%, indicating confidence in long-term growth.
Expert Opinions
- Sharekhan:
“The FY25 guidance upgrade was overshadowed by muted mega deal wins and potential Q4 revenue declines. Long-term investors should monitor discretionary spending recovery and BFSI demand closely.” - Antique Stock Broking:
“While we see improving demand in specific segments, the weaker Q4 revenue outlook and slower growth in Europe warrant caution. Maintain HOLD with a target price of ₹2,025.” - Nirmal Bang:
“Infosys remains a solid long-term investment, but near-term challenges necessitate a conservative approach. FY26 could mark the beginning of stronger growth momentum.”
FAQs
Why did Infosys shares fall despite strong Q3 results?
Despite strong Q3 earnings, Infosys shares fell due to muted large deal wins, concerns over Q4 revenue de-growth, and a cautious outlook for FY26.
What was Infosys’ Q3 performance?
Infosys reported a 11.4% increase in net profit to ₹6,806 crore, beating analyst expectations. Revenue guidance for FY25 was also revised upward.
How did Infosys’ ADR perform?
Infosys ADR shares dropped 5.77% overnight, reflecting similar concerns among international investors.
What is the outlook for FY25 and FY26?
While FY25 is expected to see modest growth, analysts anticipate stronger growth in FY26 as discretionary spending and demand in key sectors recover.
What are analysts saying about Infosys stock?
Many analysts have maintained a “Hold” rating, citing near-term challenges but acknowledging long-term growth potential. Target prices range from ₹2,025 to ₹2,199.
Should investors buy Infosys shares now?
Long-term investors may consider accumulating Infosys shares during dips, focusing on its strong fundamentals and potential for recovery in FY26.
What sectors are driving Infosys’ growth?
Key growth drivers include BFSI, retail, and consumer sectors, particularly in the US and Europe.
How does Infosys compare to peers like TCS and HCL Tech?
Infosys trades at a slight discount to TCS but remains comparable to HCL Tech in terms of valuation metrics and growth potential.
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