Infosys rating – Buy: Results were an all-round beat on estimates

Our relative preference for INFO over TCS is premised on its headroom for increased growth potential.

INFO reported growth of 6.3% q-o-q CC (19.4% y-o-y), ahead of our estimate of 5.7%, on the back of a broad based performance. USD revenue grew by 5.7% q-o-q (est. 4.9%) and 20.7% y-o-y in Q2FY22. In INR terms, Ebit/PAT grew 12% each y-o-y. Growth was a function of outperformance in Manufacturing (+42.5% y-o-y CC), BFSI (+20.5%), Retail (+17.2%), and Life Sciences (+26.1%). US grew 23.1% y-o-y CC, Europe rose 19.6%, and RoW increased by only 4.7%.

Large deal TCV of $2.15 bn was a tad soft (net new at 37%). However, the management indicated good traction in medium and small size deals, and reiterated that the pipeline remains strong on robust demand. Ebit margin dipped 10bp q-o-q to 23.6%, above our estimate of 22.3%, despite the impact of higher subcontracting expenses and wage hike in Q2FY22. Utilisation (+70bp q-o-q) and offshore mix (+50bp) remains stretched, despite strong hiring (11.7k, up 4.4%) in Q2FY22.

We were positively surprised by the increase in INFO’s FY22 USD revenue growth guidance to 16.5-17.5% y-o-y CC (from 14-16%), an increase of 200bp at the mid-point v/s our expectation of a 100bp rise. We continue to see scope for a beat and a raise over the next two quarters as it benefits from a better large deal focus and demand tailwind. Strong topline growth (est. +19% y-o-y) should allow INFO to keep Ebit margin impact (due to supply side challenges) within a narrow band at the upper end of its guidance (maintained at 22-24%). Apart from operating leverage, it should also benefit from further flattening of the pyramid and continued operating efficiency measures in FY23.

We see a sharp increase in attrition (20.1% in Q2FY22, up 620bp q-o-q) as concerning, especially as utilisation was at a record high of 89.2%, which is unsustainable. This remains a key monitorable.

Valuation and view: We expect the company to deliver top quartile growth performance in FY22e on the back of its strong capabilities and ramp-up of large deal wins in FY21. We have increased our FY22e EPS estimate by 2% on stronger than expected performance in Q2. We continue to see INFO as a key beneficiary of an acceleration in IT spends, given its capabilities around Cloud and Digital transformation.

Our relative preference for INFO over TCS is premised on its headroom for increased growth potential. As INFO has outperformed TCS in FY21 and in H1FY22, we expect no valuation divergence between the two companies. Based on our revised estimates, the stock is currently trading at 26x FY23e EPS. We value the stock at 30x FY23e EPS, implying a TP of Rs 1,960. We reiterate our Buy rating.