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Tech spends not yet impacted by macro concerns, FY23 guidance unchanged

Long-term growth outlook intact on Cloud-led spends

We attended INFO’s Analyst Day, where the management reiterated its FY23 USD revenue growth guidance of 13-15% YoY and expressed optimism about continued spends on business critical Cloud-related services, despite macro-related concerns. It reiterated its long-term Cloud and Digital opportunities, shared margin levers for the future, and plans to double down on Europe.

Multiple levers on both revenue growth and profitability

No slowdown despite a weak macro: The management sees no slowdown in demand, despite weakness in the macro environment, as Digital transformation projects are a critical part of its business success. The management said it maintains a strong deal pipeline, with no slowdown in large deal momentum.

Renewed focus on Europe: There is a renewed focus on Europe. The management expects incremental spends in Europe to be as strong as the US, with increased acceptance of outsourcing. It has identified certain geographies within Europe, with a good growth potential. The management will look for M&A opportunities to expand in Europe.

Pricing improvement: INFO is actively involved in conversations with clients to improve pricing and is seeing strong traction there. It is seeking improved pricing in existing and new deals, incorporating COLA clauses in new agreements, and negotiating for an outcome/value-based pricing as an effort to improve pricing. The improved pricing will accrue with a lag, and should flow through revenue and profit within the next two quarters.

Margin expansion: INFO shared six levers for margin expansion going forward: 1) pyramid rationalization, 2) offshoring, 3) optimizing sub-contractor usage, 4) Automation, 5) operating leverage, and 5) improved pricing.

Strategy focus remains on a Cloud-led model

* The management shared five strategic elements to look for going forward:

1) To scale its Cloud business: INFO has excellent partnerships with hyperscallers and SaaS players. With market-leading capabilities and its Cloud offering ‘Infosys Cobalt’, it is confident of scaling this business.

2) Continued intensity in Digital: The management plans to expand on the Digital front, with opportunities around Data Analytics and AI, enterprise tech, ER&D services, IoT, Cybersecurity, and experience.

3) Focus on next-generation businesses: INFO will continue its next generation seeding, building partnerships with digital native companies. It will focus on newer opportunities in Europe and on sustainability, and invest in new technologies such as the Metaverse, Quantum, Web 3.0, and blockchain.

4)​​​​​​​ Advanced Automation: INFO will continue to drive automation, with next generation BPM, advanced ADM, and using AI and ML.

5) Focus on employees and talent: The management will focus on employee engagement, providing a predictable career path, and re-skilling employees to attract new talent and retain existing talent.

Valuation and view

* Though growth in 4QFY22 was muted, demand remains intact and its order book strong. The management’s FY23 growth guidance and high headcount addition provide further visibility on demand.

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

* We expect the company to be a key beneficiary of an acceleration in IT spends. Based on our revised estimates, the stock is currently trading at 21x FY24E EPS. We value the stock at 28x FY24E EPS, implying a TP of INR2,000.

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