Stepping on the digital accelerator

* At its first virtual analyst meet, Infosys provided an update on its growth strategy that is built around four pillars: 1) scaling the agile digital business (~US$6.3bn revenue run rate), 2) energizing clients’ core technology landscape via AI and automation, 3) reskilling employees, and 4) expanding localization in markets such as US, Europe and Australia.

* Large deal signing remained robust with deal TCV of US$8.3bn on TTM basis (net new share ~54%). Net new deal TCV grew ~59% YoY in H1. The pipeline of large deals expanded significantly with a higher ratio of net new TCV share.

* The company reaffirmed its FY21 outlook of 2-3% YoY CC revenue growth and 23-24% EBIT margins. Full-year outlook implies a 0.5-1.7% CQGR over the remaining two quarters. It expects growth to accelerate in FY22.

* Infosys is likely to outgrow TCS for the second year in a row in FY21 while narrowing margin differential. We expect Infosys’ valuation gap with TCS to narrow down further on the back of sustained strong operating performance. We maintain Buy/OW in EAP, with a TP of Rs1,360 at 25x Sep’22E earnings.

Pandemic has accelerated cloud adoption and digital transformation: The digital business contributed 47.3% of revenue in Q2FY21 (~US$6.3bn annual run rate). The company has laid out a comprehensive digital service architecture, encompassing five dimensions – Experience, Insight, Innovate, Accelerate and Assure – across the entire gamut of the client’s digital journey. Infosys is seeing accelerated demand in the area of digital and cloud on account of the pandemic and it believes that it is rightly placed to capture these opportunities. Cloud is evolving as the foundation of an enterprise’s digital journey and Infosys expects US$500bn of enterprise cloud spend over the next 3 years. Infosys has recently launched a set of services, solutions and platforms for enterprises branded as Cobalt to accelerate their cloud journey and drive overall digital growth as ~50% of spend in digital is cloud related. Infosys is making necessary investments into organic capabilities building and also strengthening its digital services capabilities through tuck-in M&A deals.

Recalibrating offerings to capitalize on 7 mega themes: Infosys has identified seven mega themes – a) consumerization of user experience, b) growing adoption of open-source technology in enterprises, c) cloud, d) data, e) cybersecurity, f) rise of platforms, and g) modernizing legacy systems. These themes are expected to reshape technology spending and Infosys is recalibrating its offerings to benefits from these trends. Covid-19 has accelerated these trends in last few months as enterprises faced existential crisis and accelerated their digital journey.

M&A remain integral part of growth strategy: Infosys has followed a three-pronged approach to drive M&A – 1) strengthen digital services capabilities (WongDoody, Brilliant Basics, Blue Acorn, Simplus, Fluido, and GuideVision), 2) deepen vertical capabilities (Stater JV – Mortgage/Financial Services, Kaleidoscope Innovation – Healthcare), and 3) expand geographical footprint (Compaz JV – Singapore, HIPUS JV – Japan). Infosys has invested ~US$800mn into M&A deals (7 acquisitions and 3 JVs) and believes that M&A remains an integral part of its overall growth strategy.

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