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Solid operating performance

* Infosys delivered another stellar quarter, beating our and consensus estimates on revenues and margins. Revenues grew 6.2% QoQ (highest in Q3 in 8 years) to USD3.5bn. Digital revenues rose 12.4%/33.8% QoQ/YoY, contributing over 50% of overall revenues.

* Infosys raised its FY21 revenue growth guidance to 4.5-5% in cc terms (earlier 2-3%) and EBITM guidance range to 24-24.5% (earlier 23-24%) based on 9M performance and robust deal wins. Revenue guidance implies 0.5-2.5% QoQ growth in Q4.

* Infosys recorded an all-time high deal TCV of USD7.13bn in Q3 (73% net new). Deal TCV signed in YTD FY21 was ~USD12bn (+63% YoY) with net new deal wins of USD8.2bn (~3.3x YoY). The deal pipeline is healthy (tad lighter after strong conversions in Q2/Q3).

* We raise FY21/22/23E EPS by 3.5%/5.5%/5.1% on strong Q3. We expect Infosys’ valuation gap with TCS to narrow down further on the back of sustained strong operating performance. The stock has rallied ~20%/~80% in last 1M/1Y. We maintain Buy/OW in EAP with a revised TP of Rs1,550 (Rs1,470 earlier) at 25x FY23E earnings.

What we liked? Strong operating performance, broad-based revenue growth, upward revision in FY21 guidance, robust large deals intake (US$ 7.13bn; net new share at 73%).

What we did not like? Softness in Hi-Tech business

Infosys delivers another stellar quarter: Infosys delivered another stellar quarter, beating our/consensus estimates on revenue and margins. Revenue grew 6.2% QoQ/8.4% YoY (5.3%/6.6% QoQ/YoY in CC) to USD3.5bn. EBITM remained flat at 25.4% in Q3. Revenue growth was broad based, led by BFSI (9.8% QoQ), Life sciences (10.8% QoQ), Energy & Utilities (7.9% QoQ) and Manufacturing (8.5% QoQ). Infosys has signed 22 large deals with TCV of USD7.13bn during the quarter split across geographies (13 in NA, 7 in Europe and 2 in RoW) and verticals (8 in BFSI, 4 each in Manufacturing and E&U, 3 in Communication, and 1 each in Retail, Hitech and Others). It expects large part of net new deal wins of Q3 will start flowing into revenue from Q2FY22, considering the deal transitioning timeline.

EBITM remains flat due to transition costs: Infosys reported flat QoQ EBITM in Q3 on the back of revenue acceleration, higher utilization & offshore shift (+100bps) and favorable currency (+20bps), negated by higher subcontracting costs and promotions (-40bps), and transitioning and rebadging costs (-60bps). Infosys plans to implement a salary hike wef Jan 1, 2021, which will weigh on margins in Q4. However, revenue acceleration, high offshoring and other operating efficiencies would support margins. Management expects utilization to come down to a more sustainable range of 83-85% in the coming quarters (86.3% in Q3).

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