Buy Infosys; target of Rs 1355: Motilal Oswal

Motilal Oswal 's research report on Infosys

Infosys (INFO)’s 2QFY21 revenue and margin performance were above expectations. The company impressed with a second consecutive quarter of strong margin expansion (270bp QoQ in 2Q; ~420bp over 1HFY21). We expect some margin benefits to be sustainable (driven by automation, etc.). On the other hand, tailwinds (such as increased offshoring, lower attrition, deferred wage hikes, and lower travel/SGA costs) as a result of the pandemic are likely to partly wane out later on as the situation normalizes further over the next few quarters. The highest ever deal wins were reported (~USD3.15b), and the deal pipeline remains healthy. Upward revision to FY21 guidance – with revenue growth of 2–3% YoY CC (v/s 0–2% earlier) and margin guidance of 23–24% (v/s 21–23% earlier) – is positive, but still conservative. We expect Infosys to deliver above guidance in FY21 a) notwithstanding margin headwinds (wage hikes in 4Q, large deal ramp-up, seasonality, above margin factors, etc.) and b) based on strong deal wins. We upgrade our FY21/FY22E EPS estimates by 9%/12% as we adjust our revenue and EBIT margin trajectory. Infosys should be a key beneficiary in terms of recovery in IT spends in FY22. Additionally, leading operational performance in 1HFY21, coupled with strong deal wins, should translate to strong outperformance on EPS growth (v/s the sector). Reiterate Buy.

Outlook

As Infosys has outperformed TCS in 1HFY21 and is on its way to an industry-leading performance in FY21 (amongst Tier I), we expect the divergence in the valuation to narrow (to 10%). On our revised estimates, the stock is currently trading at 21x FY22 EPS. We value the stock at 25x FY22E EPS (10% discount to TCS). Reiterate Buy.

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