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Strong pickup in margin and deal wins to drive earnings growth

* INFO reported an in line 2QFY23 revenue of USD4.55b, up 4% QoQ in CC terms. It announced a large deal TCV of USD2.7b (up 59% QoQ, net new at 54%), which was its highest in the last seven quarters and was aided by a strong pickup in cost optimization-related work. The management sees traction in the large deal pipeline, despite an adverse demand environment.

* The management said it is seeing weakness in parts of Retail, Hi-Tech, Financials (Mortgages), and Telecom as it has started seeing some dealrelated slowdowns in these segments. Despite this, it updated its revenue growth guidance for FY23 to 15-16% YoY in CC terms (from 14-16% earlier). It also highlighted its ability to secure Digital and cost savings-related work.

* EBIT margin grew 150bp QoQ at 21.5% in 2QFY23, above our estimate of 20.2%, on cost optimization, depreciation in the INR v/s the USD, and lower sub-contractor expenses. The management narrowed its margin guidance to 21-22% from 21-23% earlier. We view the lower end as achievable.

* We were positively surprised by INFO’s margin performance, as that was the key concern among investors, given the supply-related headwinds. While INFO has done exceptionally well in lowering sub-contractor cost, we see scope for further improvement in FY24.

* While the management highlighting of some verticals as slow moving is a cause for concern, the large deal TCV in 2QFY23 should provide some buffer from any impact on revenue. INFO’s 2HFY23 guidance implies weak growth over the next two quarters, which was within our expected range and should not alter the business opportunity. We factor in 9.6% revenue CAGR over FY22-24, despite cross-currency headwinds. We factor in a margin of 21.1%/21.3% in FY23/FY24, leading to 11% PAT CAGR over FY22-24.

* We have kept our FY23/FY24 EPS estimate broadly flat after the 2QFY23 result and view INFO as a beneficiary of an acceleration in IT spends, given its capabilities around Cloud and Digital transformation. We value the stock at 25x FY24E EPS and reiterate our Buy rating.

Large margin beat in 2QFY23; guidance narrows; announces buyback

* In CC terms, revenue grew 18.8% YoY, INR EBIT rose 13%, and INR PAT increased by 11% in 2QFY23.

* Revenue stood at USD4.56b, up 4% QoQ in CC terms, marginally below our estimate of 4.3%. Reported USD grew 2.5% QoQ. ? USD revenue/INR EBIT/INR PAT grew 15.7%/8.9%/7.2% in 1HFY23.

* There was a huge EBIT margin beat at 21.5% (est. 20.2%), up 150bp QoQ.

* The management narrowed its FY23 revenue growth guidance to 15-16% (from 14-16% YoY earlier) in CC terms. The margin guidance narrowed to 21- 22% from the lower end of its earlier range of 21-23%.

* INFO saw a large deal TCV of USD2.7b, up 59% QoQ and 26% YoY, which was the largest in the last seven quarters.

* INFO reported a good FCF/PAT conversion ratio of 79% in 2QFY23. Cash and investments stood at USD4.78b.

* Net profit grew 12% QoQ to INR60.3b (in line).

* It announced an interim dividend of INR16.50/share and an open market share buyback of INR9.3b at a max buyback price of INR1,850/share.

Key highlights from the management commentary

* INFO reported a strong TCV of USD2.7b (the highest in the last seven quarters), of which 54% were net new. The deal pipeline remains healthy and larger than preceding quarters, with a higher focus on cost programs.

* It is seeing clients turning cautious. Besides some parts of Financial Services and Retail, it is also seeing some impact in Hi-Tech and Telecom in the form of reduced spends towards discretionary programs.

* Though the third and fourth quarter is seasonally weak and are impacting margin, INFO expects it to be compensated by the easing of supply-side issues.

Valuation and view

* INFO posted a strong set of earnings in 2QFY23. Demand and the order book remain robust. Its strong FY23 growth guidance and high headcount addition provides further demand visibility.

* We expect INFO to deliver margin at the lower side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls.

* We expect INFO to be a key beneficiary of an acceleration in IT spends. Based on our revised estimates, the stock is currently trading at 22x FY24E EPS. We value the stock at 25x FY24E EPS, implying a TP of INR1,630.

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