Infosys 4QFY18 results were a mixed bag. Revenues at USD2805mn were up 1.8% QoQ and marginally below our estimates (Ple: USD2824mn). Constant currency growth for the quarter stood at 0.6% below our estimates (Ple: 1.5% cc growth). EBIT margin came at 24.7% up 40bps QoQ and above our estimates (PLe: 24.6%). PAT for the quarter came at Rs36.9bn marginally below our estimates owing to lower other income (PLe: Rs37.4bn). Among verticals, BFSI vertical revenues were up 0.1% QoQ in constant currency and Retail &CPG vertical revenues were down 0.7% QoQ in constant currency. Among Geographies, North America revenues were up 0.1% QoQ in constant currency and revenues from Europe were down 0.2% QoQ in constant currency. Absence of growth uptick in BFS (excluding Insurance) and Retail &CPG vertical which together account to 39% of total revenues is a concern. Tepid growth in developed markets is also a concern. Insourcing by select North American banks and disruption of Traditional retailers owing to online retailers (Amazon) is weighing on growth in these verticals.
For FY19E, Infosys guided for 6‐8% YoY constant currency growth in line with our estimates ( vs 5.8% cc revenue growth delivered in FY18). Infosys has lowered EBIT margin guidance at 22‐24% for FY19E (vs 23‐25% earlier).Management guided that it intends to increase investments in Digital, expand Sales investments to drive large deal wins and focus on localization of business (investing in onsite delivery and local hiring). Hence, Infosys has reset the margin band lower despite strong margin execution in FY18 and favourable 4QFY18 exit EBIT margin (which is 24.7%). We believe Infosys is building conservatism in margin guidance. Considering the strong execution on margin front in FY18, we only marginally trim our EBIT margin assumptions to 23.9/24.1% for FY19E/FY20E (v/s 24.1/24.5% modelled earlier). We also trim our USD revenue growth assumptions to 8.4/8.5% for FY19E/FY20E (vs 9.1%/8.7% modelled earlier). Led by USD revenue downgrade, modest EBIT margin downgrade and lower other income (factoring special dividends) we marginally trim our EPS estimates by 2.6/2.5% for FY19E/FY20E to Rs 69/77/sh for FY19/FY20E. Infosys aims to return Rs130bn to shareholders in FY19E. While Rs26bn has been earmarked for special dividend (to be given in June), we believe Infosys could only do a Buy back post Dec 15, 2018 (completion of one year from earlier Buyback). Retain TP at Rs1220/sh (16x FY20E EPS vs 15.5x FY20 EPS earlier) and maintain BUY.
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