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With FY25 constant currency (CC) revenue growth at 4.2 per cent, which follows a very weak FY24 in which the CC revenue growth was at just 1.4 per cent, Infosys is staring back at its weakest two-year performance in almost the last 25 years.
However, this is not the end of the slowdown, with the company guiding for FY26 CC revenue growth of 0-3 per cent, with the upper end of 3 per cent based on optimistic management assumptions that there will be steady to marginally improving business environment. That could be a hard ask, given the global tariff-war driven uncertainties and the US recession probability having increased in recent weeks.
Even assuming the company is able to achieve the mid-point of the range of 1.5 per cent, its three-year CC revenue CAGR will be 2.3 per cent. CC revenue growth is one of the best gauges to assess the health of underlying business trends for IT services companies.
Taking this weakness into consideration, the Q4 results, where the company missed consensus revenue and EBIT expectations by 2.83 per cent and 1.57 per cent, respectively, while disappointing, actually takes a back seat.
The question that investors need to ponder is what underlies this weakness in growth. There is a possibility that some parts of the weakness could be structural, with smaller IT players gaining market share and AI, too, disrupting IT services business.
Below nominal GDP
The two-year (FY23-25) CC revenue CAGR at 2.8 per cent is lower than even the nominal GDP growth in the largest market the company caters to — the US, from where it derives 57 per cent of its revenues. Typically, companies with growth prospects grow at rates well above the nominal GDP of an economy. To the extent the weakness in Infosys performance is cyclical, it will rebound along with the industry.
But the structural part may require longer fixes. For example, it is worth noting that even while TCS reported weak results and outlook, its management noted their expectation that FY26 is likely to be better than FY25. This contrasts with Infosys CC growth, expected to decline to 1.5 per cent in FY26 from 4.2 per cent in FY25.
At bl. portfolio. in our edition dated June 6, 2021, we had recommended investors to book profits in Infosys. Since then the stock is flat, significantly underperforming Nifty 50, which is up 52 per cent in the same period. We had consistently maintained a view during this four-year period that the stock is expensive relative to growth prospects and its Q4 results/outlook does not help to change that view at all.
At 22 times trailing PE, while its valuation is at the lower end of the range post the recovery from Covid slump in March 2020, it is not cheap compared with pre-Covid levels or on an absolute basis given its sluggish growth.
Published on April 17, 2025
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