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Steady operating performance; well placed to manage near term uncertainty

Result Synopsis

Infosys (INFO) reported mixed financial performance for the quarter. While, the revenue growth was above estimate, EBIT margin came in below expectation. It reported constant currency growth of 2.4% QoQ, led by Manufacturing( up 36.8% YoY in cc terms) and Energy and Utilities( up 25.9% YoY in cc terms). The INR reported growth of 4.9% QoQ was supported by depreciation of INR by 2.9% QoQ vs USD. EBIT margin remained flat QoQ at 21.5% There was some moderation in employee attrition as LTM attrition was down 280 bps QoQ to 24.3%.

The multiyear tech adoption cycle broadly remains intact led by adoption of cloud and data analytics. However, the clients have become cautious regarding the evolving macroeconomic situation especially in Europe and there are signs of slowdown in discretionary spending in sectors such as Hitech, Retail, Telecom, etc. and can lead to near term moderation in revenue growth. Employee attrition has started moderating and should support operating margin going ahead We estimate revenue CAGR of 16.6% over FY22?24E with average EBIT margin of 22.3%. We maintain our BUY rating on the stock with revised target price of Rs 1,780/share at 24.0x on FY24E EPS. The stock trades at PER of 25.2x/20.0x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 383.2bn (up 4.9% QoQ in INR terms, up 2.3% QoQ in USD terms). The cc growth was 2.4% QoQ. Digital now accounts for 62.9% of revenue vs 61.8% in Q2FY23. In terms of verticals, the growth was led by Manufacturing (up 36.8% YoY in cc terms) and Energy and Utilities (up 25.9% YoY in cc terms).

* EBIT margin remained flat (down 4 bps QoQ) to 21.5%, led by increase in Depreciation Expenses (up 9.3% QoQ). Large deal wins were strong at $3.3bn vs $2.7bn in Q2FY23 and $2.53bn in Q3FY22.

* Gross client addition was 134 vs 103 in Q2FY23. Days sales outstanding increased to 68 days vs 65 in Q2FY23. Offshore effort mix was down 10 bps QoQ to 75.5%. Added 1,627 employees in the quarter to close at 3,46,845 employees.

* LTM attrition was down 280 bps QoQ to 24.3%. Utilization (excluding trainees) was down 190 bps QoQ to 81.7%

* FY23 revenue guidance revised to 16.0%-16.5%. FY23 operating margin guidance retained at 21%-22%.

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