Infosys investors blow hot, blow cold on Q3 revenue beat, guidance revision

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Subscribe to enjoy similar stories. Infosys Ltd investors are edgy and hardly impressed by the positives of its December quarter (Q3FY25) results. Sequential constant currency (CC) revenue grew by 1.7% in a seasonally weak quarter, beating consensus estimate of 0.8%.

This prompted Infosys to raise its FY25 year-on-year constant currency (CC) revenue growth guidance 4.5-5% from 3.75-4.5% earlier. With that, the mid-range of the guidance increased by around 60 basis points (bps). But the devil is in the details.

The beat in Q3FY25 revenue growth was largely driven by higher revenues from sale of third-party items bought for service delivery to clients, also known as pass-through revenue. In fact, the cost of software packages for service delivery to clients as a percentage of Infosys’s revenue increased by 150 bps to 9.6% in Q3FY25, the highest ever, highlighted Kotak Institutional Equities. Gradual increase in such revenue has weakened the quality of revenue mix, said the Kotak report, adding that third-party software sales have a significantly lower Ebit margin and distort the cost structure.

In simple terms, this kind of bump-up in revenue raises concerns over the sustainability of earnings growth. “The revised guidance implies a sequential decline of 2.5% to 0.6% in Q4, this because of absence of pass-through income and the continued impact of partial furloughs," said Emkay Global Financial Services. Small wonder then that Infosys stock tanked around 6% on Friday on the NSE.

Infosys American Depositary Receipt (ADR) listed on New York Stock Exchange plunged 5.7% on Thursday. Infosys is seen as a key beneficiary of improvement in discretionary spending by IT clients. With that, lesser reliance on bundled deals for