Infosys rating: Buy — Standout showing by the company

Our view on Infosys’ growth leadership is unchanged. We raise FY2021-23e EPS by 7-8% and raise our Fair Value to Rs 950, valuing the stock at 20X (~18X earlier) June 2022e earnings.

Infosys reported a stellar quarter with a significant beat on revenues and margin performance. We also note solid TCV, mega-deals, a material decline in attrition and reinstated guidance. Infosys is reaping the benefits of localisation, sprucing up digital competencies, institutionalising the large deals process and building muscle in offerings where it lagged such as BPO.

Our view on Infosys’ growth leadership is unchanged. We raise FY2021-23e EPS by 7-8% and raise our Fair Value to Rs 950, valuing the stock at 20X (~18X earlier) June 2022e earnings. Buy stays.

Detailing a few thoughts on material revenue outperformance: Infosys bucked the sector trend with a sequential revenue decline of just 2% in c/c basis and reported growth of 1.5% y-o-y. For context, we highlight that revenues for all IT companies saw a swing of 6-7% on a sequential basis on the back of supply side impact, cut in discretionary spending and aggressive spending pullback by clients in directly impacted verticals.

Infosys also reported stability across verticals and growth in some like communications, life sciences and hi-tech; exceptions to the trend were manufacturing (-8.2% q-o-q) and retail (-9.9% q-o-q). We attribute the outperformance to—(i) lo-wer supply side impact at just 0.2% of revenues; (ii) ramp-up of strong net new deals won in Q4FY20; (iii) its portfolio of banking clients may not have cut spending; (iv) better execution and market share gains; and (v) exposure to high growth, hi-tech vertical accounts.

Strong revenue performance results in sequential and y-o-y increase in Ebit margin: Ebit margin increased 150 bps q-o-q and 220 bps y-o-y. Sequential increase was aided by—(i) 230 bps from lower travel expenses; (ii) 70 bps from Rupee depreciation; and (iii) 110 bps from lower SG&A offset by—(i) 150 bps from lower utilisation, higher onsite and lower price realisation; and (ii) 100 bps headwind from higher variable pay. Net profit at Rs 42.3 bn grew 12.4% y-o-y and declined 1.5% q-o-q and was 10.8% higher than our estimate. OCF generation was strong at 140.4% of net profit and aided by lower tax payout and lower working capital cycle.

Guidance reinstated with 0-2% revenue growth for FY21e and 21-23% Ebit margin: Realising revenue guidance requires CQGR of 0.5-2% for the remaining three quarters of FY2021e, reasonable—in our view. We see support coming from Vanguard mega-deal, strong deal wins, pipeline in cloud, digital and cost efficiency. Infosys expects Ebit margin of 21-23%; our forecast is based on Ebit margin of ~22% from FY2021-23e.

Raise EPS estimates by 7-8%, fair value increases to Rs 950 from Rs 775 earlier
We raise FY2021-23e revenue estimates by 5-6%. FY2021e will be the second consecutive year when Infosys will outperform TCS on revenue growth. A higher revenue estimate, in addition to margin fine-tuning, results in 7-8% increase in FY2021-23e EPS. Retain Buy with a revised fair value of Rs 950 valuing the stock at 20X June 2022e EPS. A higher multiple reflects confidence in industry matching/leading growth without sacrificing margin and maintaining payout ratios.