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Buy Infosys Ltd For Target Rs.1,970

Weak operating performance; strong FY23 revenue growth guidance

* Q4FY22 operating performance missed our expectations. Revenues grew by a mere 1.2% QoQ CC, while EBITM declined 190bps to 21.6%. Operating performance remained weak due to seasonality, a Covid-related impact in the early part of the quarter and a clientrelated contractual provision (likely to be recovered in FY23).

* Infosys has guided for 13-15% YoY CC revenue growth in FY23, implying a healthy 2.7- 3.4% CQGR on the back of broad-based demand, robust deal intake and pipeline, and progress in client mining efforts. It has guided for 21-23% EBITM for FY23 (vs. 23% in FY22), considering wage inflation, planned investments and uptick in travel/other costs.

* Large deals intake remained healthy at USD2.3n in Q4FY22 (48% net new) and USD9.5bn in FY22 (40% net new), giving good growth visibility for FY23. The deal pipeline remains healthy across deal sizes (highest ever for large deals).

* We cut FY23/FY24 estimates by 7.2%/4.9%, factoring in the Q4 miss and lower margin guidance. The operating performance miss would weigh on the stock in the near term. We maintain Buy with a revised TP of Rs1,970 at 28x Mar’24E EPS, considering broad-based demand, steady market share gain and robust cash generation.

What we liked? Strong FY23 revenue growth guidance; healthy deal intake

What we did not like? Lower EBITM guidance of 21-23% for FY23; spike in attrition (27.7% on LTM basis vs. 25.5% in Q3); softness in BFSI, Life Sciences and Retail verticals

Disappointing Q4; strong FY23 revenue guidance of 13-15%: Revenue grew by 0.7% QoQ (1.2% QoQ CC) to USD4.28bn, missing estimates due to seasonality, a Covid-related impact in the early part of the quarter and a delay in revenue realization in a client contract. Revenue growth was led by Manufacturing (5.2% QoQ), E&U (3.3%), and Communications (3.1%). Life Sciences declined 11.4% due to the absence of benefits from few one-time deals in Q4 vs. Q3. The company continues to invest in cloud and digital capabilities as it intends to capture significant demand opportunities it is currently witnessing. Deal intake for Q4 was healthy at USD2.3bn (48% new). Infosys gave a strong FY23 revenue growth guidance of 13-15% CC, implying a 2.7-3.4% CQGR in FY23 on the back of broad-based demand, robust deal intake, progress in client mining efforts and a healthy deal pipeline.

Margins under pressure; FY23 EBITM guidance of 21-23%: EBITM contracted ~190bps QoQ to 21.6% due to 1) impact of lower working days, client-related contractual provision and lower pricing (-160bps); 2) lower utilization (-60bps); and 3) higher visa and third-party costs and other investments (-100bps), partly offset by salary benefit on account of lower working days (+110bps) and other operating efficiencies. The salary hike, backfilling costs, investments in digital and cloud capabilities, lower utilization due to increased fresher hiring and normalization of discretionary costs (travel, facility and other related costs) are potential headwinds for margin in FY23, which the company plans to partly offset by revenue growth led operating leverage, value-based pricing, optimizing subcontracting costs, automation and cost rationalization programs. It has guided for 21-23% EBITM for FY23 (vs. 23% in FY22).

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