Infosys, a key player in the Indian IT sector, has recently encountered a wave of downgrades despite reporting positive financial results for the April-June quarter. The company has seen its stock rated with 'hold' or 'sell' calls by 18 out of 36 brokerages that cover the company. The remaining 28 brokerages had a 'buy' rating. In the last quarter, 33 out of 48 brokerages had a 'Buy' call on Infosys, while the remaining 15 had a 'Hold' or 'Sell' call.
The looming threat of a global recession, combined with rising subcontracting costs, and cross-currency headwinds, has cast a shadow over Infosys's operating margins, according to Axis Securities. The brokerage expects a rebound in demand as current uncertainties subside over the next two to three quarters, which could lead to consistent deal wins for the company.
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Infosys reported a revenue increase to Rs 39,315 crore for Q1 FY25, marking a 3.7 percent QoQ rise. However, the net profit for the quarter fell by 20.1 percent QoQ to Rs 6,368 crore, largely due to a tax refund boost in the previous quarter. Despite these results, Infosys is grappling with several challenges that have led to increased caution among analysts.
While there are early signs of recovery in discretionary spending within financial services, other verticals face challenges. The manufacturing sector continues to experience pressure, and both the retail and energy and utilities (E&U) segments are struggling with high interest rates and inflation. Prabhudas Lilladher said, "The higher concentration of discretionary in its business mix is causing more volatility to its vertical portfolio...."
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Infosys remains optimistic about the first half of FY25 and expects a slowdown in the second half due to furlough impacts in Q3 and Q4. The company reported its highest-ever free cash flow generation in Q1 FY25 and secured a record 34 large deals. However, management has expressed concerns about discretionary spending and slow hiring, which could affect future growth. In a conference call, the company said that it will continue to assess the sustainability of the positive trend observed in the June quarter.
Infosys shares, which gained 11 percent and 19 percent in June and July respectively, have seen a decline of over 6 percent since August began. As of 10.50 am, Infosys shares were down 2 percent at Rs 1,756.
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