Infosys Stock Falls 6%: Key Reasons Behind the Decline and Investor Insights

Infosys – one of the largest IT service companies in India – saw shares fall 6% on Jan 17, reflecting a similar 6% plunge in its ADRs trading on the NYSE. This drop comes despite the company posting strong earnings for the October-December quarter (Q3 FY25) and raising its full-year revenue guidance. The primary trigger for the drop seems to be the uncertainty surrounding the company’s Q4 performance, along with concerns about wage hikes and potential margin impacts. We are going to deconstruct the cause of the recent fall in Infosys stock prices and what that bodes for investors in the near term as well as in the long run.

A Decent Quarter, But Questions Still Remain

Infosys delivered strong deal wins in Q3, causing management to up its revenue growth guidance. It raised the constant currency growth outlook for FY25 from 3.5% to 4.5% to 5%. This was a good result of strong deal wins, including a large deal of $2.5 billion, with 63% of the deals being net new. However, concerns about the company’s Q4 performance started to gain precedence over these strong numbers.

Key Drivers Behind the Decline:

1. Concerns Over Q4 Performance: Analysts, including Jefferies and Bank of America Securities (BoFA), raised concerns about the potential seasonal weakness in Q4. While Infosys hiked its full-year guidance, the unchanged Q4 ask rate indicated moderation in its core business performance. The company admitted to softer Q4, and it said that factors like furloughs, fewer working days, and a reversal of third-party revenue, generally headwinds in Q4, have led to that.

2. Wage Hike Impact: Another factor that added to the uncertainty was the company’s wage hike regime, which is expected to impact its margins. Infosys implemented the first phase of wage hikes on January 1, with a second phase scheduled for April 1. While wage hikes are expected to retain talent, they also come with the downside of increased costs. The company did not elaborate on the margin impact but clarified that the wage hikes would be reflected in Q4 FY25 and Q1 FY26. The additional layer of uncertainty around margins was one reason for the decline in the stock.

3. Stock Valuation and Profit Booking: Despite having a good three-quarters of FY25, Infosys stock has been a victim of profit booking. The stock has gone up by nearly 120% in the last year, and it has been underperforming other IT stocks in the last few weeks. This fall in the stock price, especially after a long run-up, reflects profit-taking by investors who might have anticipated the stock to be under pressure in the near term. Infosys shares have been trading at high valuations, and analysts have observed that the stock was overvalued considering the moderation in core business performance.

Q3 Performance by the Company: A Silver Lining

Despite the valid concerns over Q4 and wage hikes, Infosys’ Q3 performance was not without positive aspects that investors would do well to remember.

1. Stronger Earnings: Infosys reported a 4.6% sequential increase in its consolidated net profit for Q3, amounting to ₹6,806 crore, compared to ₹6,506 crore in the previous quarter. The company’s revenue for the quarter grew by 2% in rupee terms to ₹41,764 crore, up from ₹40,986 crore in Q2. The company surpassed analyst expectations, with a Moneycontrol poll estimating a net profit of ₹6,734 crore and revenue of ₹41,206 crore. Such was a positive surprise that despite such seasonality affecting Q4, the company displayed strong performance well up to Q3.
2. Improved EBIT Margin: Infosys also posted a 20 basis points increase in its EBIT margin, which came in at 21.3% for Q3. The company maintained its EBIT margin guidance for FY25 at 20-22%. The wage hike would indeed put some pressure on the margins in the short term; however, the company’s ability to improve its margins in Q3 is a good sign for investors looking at long-term growth prospects.
3. Healthy Deal Pipeline: The company reported a big deal Total Contract Value (TCV) of $2.5 billion, with 63% of the deals being net new. This was a good indicator of future growth as large and new deals tend to generate significant revenues over time. Improved deal pipeline, especially in verticals like financial services in Europe and retail and consumer segments in the US, gives management greater confidence as it looks ahead.
4. Improved Discretionary Spending: It was notable in the call that discretionary spending improves in different lines of revenue and, in Infosys’ words, “We had improvements, particularly within the financial services vertical in Europe or even the US, retailing consumer segments. Some optimism regarding growth in terms of discretionary, though still with uncertainty.”

Does It Mean Investors Need to Rethink Expectations?

While the stock price does have immediate concerns surrounding Infosys — seasonal weakness in Q4, less-than-expected margin impacts from wage hikes, among others — the company continues to book significant deal wins and sees improving discretionary spending in many key sectors, which helps provide solid foundation for long-term growth. For investors, now’s an opportunity to reevaluate their positions and take a longer-term view.

Infosys will face volatility in the near term due to issues such as a hike in wages, seasonal weakness in Q4, and investors’ profit booking. Investors searching for short-term returns may find this stock not as attractive since the above-mentioned factors are quite disturbing in the short term.

• Poor short-term: performance of the stock may provide investors with a reason to buy shares into the stock because it will easily recover once some of these problems are sorted.
• Long-term growth prospects: Looking at Infosys’ long-term growth prospects, the company’s strong deal pipeline, its presence in key verticals like financial services and retail, and its improving discretionary spending outlook point to sustained growth. The ability of the company to adapt to market changes and manage costs effectively will be the key to maintaining its competitive edge.

Conclusion

However, Infosys stock is trading at quite high valuations. Yet, solid fundamentals along with the tremendous growth potential in the future may support the idea of such an investment for the medium to long term. The investors should keep an eye on how the company manages its wage hike and seasonal challenges in Q4 as that would ultimately determine the future performance of its stocks.

Infosys performed a strong quarter with robust earnings, improved margins, and a healthy deal pipeline, but the concerns related to wage hikes, Q4 weakness, and stock valuations have had a short-term impact on the stock price. However, the medium-term prospects of the company remain to be outstanding. For investors, it is a balanced approach that will assess the short-term risks and long-term growth potential before any decision.

In the near term, Infosys’ stock might see fluctuations, but with leadership in the IT services space and improving fundamentals, it’s a stock worth watching. Key indicators to track include the impact of wage hikes, Q4 performance, and whether the company can deliver on its strong deal pipeline be important metrics to track, making informed decisions to hold, buy, or sell positions in Infosys.