Buy Infosys Ltd For Target Rs. 1,640 - Emkay Global Financial Services Ltd
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Revenue growth momentum accelerates; EBITM disappoints
* reported mixed performance in Q1, with revenue beating our estimates and margin missing our Infosys expectations. Revenue grew 3.8% QoQ to USD4.44bn (5.5% CC), driven by broad-based demand. EBITM declined 150bps to 20.1% due to increased cost pressures.
* The company raised its FY23 revenue growth guidance to 14-16% CC (13-15% earlier), implying a 1.4-2.6% CQGR over Q2-Q4, on the back of strong Q1, broad-based demand, solid deal intake and pipeline. It has retained EBITM guidance at 21-23%, but expects it to be at the lower end of guided range, considering Q1 performance and cost woes.
* Though large deal intake has moderated, it was healthy at USD1.7bn in Q1. As per management, large deal pipeline expanded in the last 3-6 months. Healthy large deal wins, progress on client mining and robust deal pipeline give good growth visibility for FY23.
* We cut FY23/FY24/FY25E EPS by 1.9%/0.1%/0.1%, factoring in the Q1 performance. The margin miss should lead to our/consensus earnings downgrades, though revenue beat estimates. We maintain Buy with a TP of Rs1,640 (23x Jun’24E EPS), considering continued market share gains, expected margin recovery, and steady cash generation.
What we liked? Strong Q1; broad-based revenue growth; and upward revision of FY23 revenue growth guidance
What we did not like? EBITM miss in Q1; FY23 EBITM guidance at the lower end of the guided range; and elevated attrition (28.4% on LTM basis vs. 27.7% in Q4).
Mixed performance in Q1; FY23 revenue guidance raised to 14-16%: Revenue grew 3.8% QoQ to USD4.44bn (5.5% CC), better than our estimates. Revenue growth was broadbased and led by E&U (7.3% in USD), Manufacturing (6.5% QoQ), Communications (5.5%), Retail (5.3%), and Hitech (3.8%) from a vertical perspective and North America (4.5%) and Europe (3.0%) from a geographic perspective. The demand environment remains healthy so far, with weakness seen in select pockets like mortgages and parts of Retail. Management remains watchful of emerging macro situations and their impact on clients’ budgets. The company continues to invest in cloud and digital capabilities as it intends to capture significant demand opportunities it is currently witnessing. Infosys upped its FY23 revenue growth guidance to 14-16% CC, implying a 1.4-2.6% CQGR over Q2-Q4, on the back of broad-based demand, robust deal intake and pipeline, and steady progress in client mining efforts
EBITM declines 150bps QoQ: EBITM contracted 150bps QoQ in Q1 to 20.1% due to salary hikes (-160bps), lower utilization (-40bps), higher subcontracting costs (-30bps), partly negated by currency gain (+30bps) and benefits accruing from higher working days, and a reversal of client contractual provisions (+50bps). The company has retained EBITM guidance at 21-23%, but expects it to be at the lower end of the guided range, considering Q1 performance and cost woes. Optimization in subcontracting costs, higher utilization, automation, pyramid rationalization, pricing, and cost efficiencies remain the key margin levers that gives management confidence about margin recovery in the next three quarters
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