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Growth certainty on explosive deal wins

We maintain BUY on Infosys (INFY), following a strong 3Q print (best 3Q in 8 years) and the highest-ever deal wins translating into growth leadership in tier-1 IT. TCV of large deal wins (including largest-ever Daimler deal) stood at USD 7.1bn (net new TCV at USD 5.2bn). Growth in 3Q was led by NorthAmBFSI (Vanguard ramp-up), E&U, Life sciences vertical and NorthAm Manufacturing/Communications. INFY scores high on growth visibility based on a staggering 3.5x growth in 9MFY21 net-new large deal TCV over the prior period. Growth ahead is predicated on (1) strong momentum in BFSI (8 large deal wins), (2) 4-4-3 large deal wins in Manufacturing, Communications, E&U verticals, (3) consolidation opportunities and continued growth in digital, driven by improving competitive advantage led by Infosys Cobalt and strong supply-side metrics (80% of digital fulfilment over past 3 years via reskilling). Our target price is Rs 1,580 at 25x Dec-22E (~10% discount to TCS and 24x earlier), supported by 20% EPS CAGR over FY21-23E.

* 3QFY21 highlights:

(1) INFY delivered its best sequential growth in the past eight years at 5.3% QoQ CC (6.6% YoY CC). (2) EBIT margin stood at 25.4%, remained flat (+7bps QoQ), supported by operating levers of higher utilisation & offshore mix (+100bps), FX tailwind (+20bps), offset by transition & re-badging (-50bps), employee promotion (-20bps) and higher sub-con cost (-50bps). (3) Wage increase effective 4QFY21 will impact margins. (4) Out of the 22 large deals wins, 8 were in BFSI, 4 in Manufacturing, 4 in E&U, 3 in Communication and 1 each in Retail/Hitech/Other vertical. By region, 13 deal in US, 7 in EU and 2 in ROW. (5) Utilisation stood at an all-time high of 86.3% and management is targeting 82-85%.

* Outlook:

INFY’s growth leadership is backed by large deal wins which is key positive for revenue visibility in the near term. We have factored in USD revenue growth of 7%, 16.1%, 12.9% for FY21/22/23E with 4QFY21 at 3.5% QoQ. EBIT margin factored in at 23.9% for 4Q and 24.1/24.5% for FY22/23E. Valuations are at 24.8/21.2x (~14% discount to TCS) with FY21-23E EPS CAGR at 20%.

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