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Buy Infosys Ltd For Target Rs.1,600

FY22 guidance leaves scope for an upward revision

Long-term traction intact, announces INR92b buyback; Reiterate Buy

* Infosys (INFO) reported 4QFY21 constant currency (CC) USD revenue growth of 2% QoQ, below our estimate of 3.1%, as a higher offshore revenue share (100bp) partially offset the strong volume growth of 4.6% QoQ.

* 4QFY21 EBIT margin declined 90bp QoQ, marginally below our estimate, due to a 130bp wage hike impact and higher subcontracting expenses (+50bp QoQ, highest in the last five years), despite more offshoring and cost optimization. In FY21, revenue (USD)/EBIT/PAT grew 6.1%/30.7%/17.5%.

* The management guided at FY22 USD revenue growth/EBIT margin of 12- 14% CC YoY/22-24%. It also characterized the current demand environment to be one of the strongest for a while.

* We expect INFO to deliver another year of ongoing guidance raise as the current one does not fully factor in strong technology demand and execution of its record high FY21 deal wins (large deal TCV of USD14.1b, 1x book-to-bill ratio). A strong topline growth (we estimate +15% YoY CC) should allow INFO to keep EBIT margin impact (due to 2QFY22 wage hike and large deal ramp up) within a narrow band at the upper end of its guidance.

* INFO reported a strong FCF/PAT conversion of 115% for FY21. FCF for FY21 increased by 44% YoY, led by a robust increase in operating income and lower capex (on account of a stall in Infra projects by the company).

* We have cut our FY22E/FY23E EPS estimate by 4%/4% given the 4.5% miss on PAT in 4Q and moderate guidance (below our expectation). We continue to see INFO as a key beneficiary of a recovery in IT spends in FY22E, given its capabilities around Cloud and Digital transformation. Leading operational performance in FY21 and strong deal wins should translate into strong outperformance in EPS growth (v/s the sector). Reiterate top Buy.

Miss on operations; guidance modest

 4QFY21 CC revenue grew 2% QoQ v/s our expectation of 3.1%.

* USD revenue for 4QFY21 grew 2.8% sequentially (v/s our estimate of 3.7%) and 13% YoY.

* EBIT margin fell 90bp sequentially (led by a wage hike and higher subcontracting expenses during 4QFY21) to 24.5%, 40bp miss from our estimate of 24.9%. On a YoY basis, margin increased 340bp.

* Utilization, including trainees, was flat during 4QFY21 at 82.2%. Voluntary attrition increased by 500bp to 15.3%.

* INFO announced a second wage hike in Jul’21 to control attrition.

* Adjusted PAT stood at INR51b, up 17.5% YoY, 5% below out estimate.

* Large deal TCV for 4QFY21 stood at USD2.1b. For FY21, total large deal TCV stood at USD 14.1b, of which 66% are net new wins.

* The management guided at 12-14% YoY CC revenue growth, EBIT margin at 22- 24%, and additions of ~26k employees in FY22, of which 24k/~2k would be recruited in India/overseas.

* Growth was a function of outperformance in BFSI (+15.6% YoY CC), Hi-Tech (+15.5% YoY CC), and Life Sciences (+18.3% YoY CC). Communication is the only vertical which has shown a decline on a YoY basis (-0.8% YoY).

* US/Europe grew 12.3%/5.1% YoY CC, while RoW declined by 0.9% YoY CC.

* 4QFY21 saw a further shift towards offshore. The mix increased to 75.7% as against 74.8% in the preceding quarter, acting as a tailwind to margin.

* Digital grew 34.4% YoY and stood at 51.5% of total revenue.

* DSO (LTM) reduced by two days sequentially to 71 days. FCF for 4QFY21 stood at INR58.2b. The FCF/PAT ratio remained healthy at 115%.

* Total cash and equivalents for 4QFY21 stood at INR386.6b (USD5.2b).

* The company announced an open market buyback of shares worth INR92b at INR1,750/share.

Highlights from the management commentary

* Large deals for FY21 stood at USD14.1b, a 57% growth over FY20. The net new share was 66%, setting up INFO for strong growth in FY22. The company won 23 deals in FY21, of which six each were won in Financial Services and Retail. Of the total, 16 were won in America, six in Europe, and one in the RoW.

* The decline in margin from 3QFY21 was due to: 1) wage hikes (130bp), and 2) increase in G&A costs (30bp), which was partly offset by operating efficiencies. Utilizations have been at record highs. However, the same is expected to reduce going forward. Attrition is expected to be at similar levels ahead. In the case of offshoring, it expects the trends of the past quarters to continue for the next couple of quarters.

* Supply-side pressures can be seen across the market, but INFO has recruited ~20k people from campuses in FY21. It expects to hire ~26k in FY22, of which ~24k are expected to be recruited in India, with the rest at on-site locations.

Valuation and view – Multiple divergence v/s TCS should narrow

* 4QFY21 saw some moderation from the industry-leading growth rates. We believe the company will show top quartile growth performance in FY22E on the back of its strong technical capabilities and ramp up in deal wins in FY21.

* For FY21, it delivered strong margin. Some margin tailwinds are not sustainable and their benefits would partially wane out as travel comes back, and attrition and offshore ratio normalize.

* We expect INFO to be a key beneficiary of a recovery in IT spends in FY22E.

* Our relative preference for INFO over TCS is premised on its headroom for increase growth potential, which was further reinforced by this result.

* As INFO has outperformed TCS in FY21, we expect the valuation divergence to narrow. Based our revised estimates, the stock is currently trading at 22x FY23E EPS. We value the stock at 25x FY23E EPS, implying a target price of INR1,600.

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