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Strong margin beat; raises FY22 revenue growth guidance

* Infosys’ Q2FY22 operating performance was ahead of expectations due to a margin beat. Revenues grew 5.7% QoQ (6.3% CC) to USD4bn, in line with estimates. Operating efficiencies and SG&A leverage restricted the EBITM decline to 10bps QoQ to 23.6%.

* Infosys raised its FY22 revenue growth guidance to 16.5-17.5% CC (earlier 14-16%), implying a 1.5-2.5% CQGR over Q3-Q4, on the back of broad-based demand, solid deal intake and healthy deal pipeline. The company retained its EBITM guidance at 22-24%.

* Large deal intake was healthy at USD2.2bn in Q2FY22 (37% new), with 22 large deals signed during the quarter. The deal pipeline remains healthy, with a good mix of new and renewal deals offering good revenue visibility.

* We increase earnings estimates by 0.4%/0.6%/0.4% for FY22/FY23/FY24, factoring in Q2 performance. We maintain Buy with a TP of Rs1,910 at 28x Sep’23E EPS, considering strong earnings momentum and robust demand environment.

What we liked?

Broad-based revenue growth, upward revision in FY22 revenue growth guidance, healthy deal intake, margin resilience

What we did not like?

Spike in attrition (20.1% on LTM basis vs. 13.9% in Q1)

Robust revenue performance; FY22 revenue guidance raised to 16.5-17.5%:

Infosys delivered strong revenue growth in Q2 and delivered double-digit YoY growth across major verticals. Revenue grew 5.7% QoQ to USD4bn, driven by strong traction in digital. Revenue growth was broad based, led by Manufacturing (18.8% QoQ), Lifesciences (10.4%), Hi-tech (8.3% QoQ), Communication (7.4%), and Financial Services (3.5%).

Infosys signed 22 large deals with a TCV of USD2.2bn during the quarter (net new 37%). Infosys upped its FY22 revenue growth guidance to 16.5-17.5% CC (earlier 14-16%), implying a 1.5-2.5% CQGR over Q3-Q4. Infosys continued to gain market share and emerged as the preferred cloud and digital transformation partner for its clients as they accelerated their digital journeys.

EBITM remains resilient in Q2; FY22 EBITM guidance retained at 22-24%:

EBITM contracted 10bps QoQ to 23.6% due to salary hikes (-110bps) and higher subcontracting costs (-50bps), partially offset by cost optimization and improvement in operational parameters (+60bps), SG&A leverage (+60bsp) and currency benefit (+30bps). The company retained its FY22 EBITM guidance of 22-24%, considering the impact of supply-side inflation, skill-based salary hikes, furloughs and likely normalization of discretionary costs like travel, facility and other related costs. However, revenue acceleration, improving business mix, employee pyramid and role ratio, pricing in digital projects, automation and other operating efficiencies would help to negate these headwinds.

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