Buy Infosys Ltd For Target Rs.1,600 - ICICI Securities
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A reality check!
Our anti-consensus sector stance on impending growth disappointments in IT (Link, Link, Link, Link) has started playing out. Organic growth reported by TCS / Infosys in Mar-21 (2.6%/2% QoQ, CC) hint at mean reversion towards growth in a typical March quarter even pre-Covid. That challenges the current consensus expectation of structurally higher growth rates for the sector post-Covid.
Management commentary on medium-term growth outlook sounded more cautious (vs in previous quarters). Large deal signings (US$2.1bn) were a tad lower than street expectations. Both revenue growth (12%-14% YoY, CC) and EBIT margin guidance (22%-24%) for FY22 were in line with consensus. However, understanding the FX assumptions baked into margin guidance is the key – (could it be 21%-23% without the recent INR depreciation?)!
Retention costs (absent over TTM) may become a key overhang on profitability as attrition jumped 520bps QoQ to 15.2%. Both the quantum (Rs92bn) and mode of buyback were disappointing given the tax / signalling inefficiency associated with open market buybacks. As we rebase our exchange rate assumptions (FY22 / FY23E to INR 75 / 76 per USD), our FY22E EPS witnesses an upgrade of 9.3% even as FY23E EPS stays stable. Despite the multiple disappointments and demanding valuations (27x FY22E EPS), we remain buyers given Infosys’ relative business momentum in the sector. (1) Intense 2nd wave in India, 2) depreciating INR, and 3) buyback can offer tactical price support.
* Disappointments at multiple levels. Revenue growth (+2% QoQ, CC) fell short of our / consensus expectations (+3%-3.2%). It should be noted this is roughly in line with the average March quarter growth of the company pre-Covid. This further corroborates our arguments that industry growth is unlikely to accelerate materially post-Covid. Strong volume growth (+4.6%) did not translate into a proportionate revenue growth due to offshore shift of the effort mix. Lower than expected impact of wage hikes (130bps) led to a slight beat (+30bps) on consensus’ margin expectations. While overall utilisations (82.2%) remained stable, effort mix shifted further offshore (+100bps) aiding margins. While attrition usually inches up post wage revisions, the spike is very sharp this time (+520bps to 15.2%).
* Medium-term outlook sounded more cautious; Guidance on expected lines. Management commentary on medium-term growth outlook sounded more cautious (vs in previous quarters). Large deal signings (US$2.1bn) were a tad lower than street expectations. Both revenue growth (12%-14% YoY, CC) and EBIT margin guidance (22%- 24%) for FY22 were in line with consensus. However, understanding FX assumptions baked into margin guidance is the key – (could it be 21%-23% without the recent INR depreciation?)!
* Remain BUYers given the relative business momentum in the sector. As we rebase our exchange rate assumptions (FY22E/FY23E to INR 75 / 76 per USD), our FY22E EPS witnesses an upgrade of 9.3% even as FY23E EPS stays stable. Despite the multiple disappointments and demanding valuations (27x FY22E EPS), we remain buyers given Infosys’ relative business momentum in the sector. (1) Intense 2nd wave in India, 2) depreciating INR, and 3) buyback can offer tactical price support.
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