Buy Infosys Ltd For Target Rs.1,550 - Emkay Global Financial Services Ltd
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Steady performance; in-line FY22 guidance
* Infosys delivered a broadly in-line operating performance in Q4. Revenue growth was a tad softer, while EBITM came in slightly better than expectations. Revenues grew 2.8% QoQ to USD3.6bn (2% CC). Digital revenues rose 5.6%/38.6% QoQ/YoY to USD1.86bn.
* Infosys guided for 12-14% YoY CC revenue growth for FY22, implying a 2.6-3.3% CQGR over Q1-Q4. The company guided for 22-24% EBITM, broadly in line with our estimates, factoring in the impact of wage hike (Jan’21 and Jul’21) and large deals’ transition costs.
* Large deal intake moderated sequentially but remained healthy at USD2.1bn in Q4 (52% new). Large deal TCV signed in FY21 was at an all-time high of ~USD14.1bn (+56.6% YoY) with net new deal wins of USD9.3bn (~2.7x YoY). The deal pipeline remains healthy.
* We lowered FY22/23E EPS by <1%, factoring in FY21 performance, buyback and higher ETR. Q4 lacked positive surprises after strong growth in the last two quarters. Strong revenue momentum with stable margins, continued market share gain, strong deal intake, robust cash conversion and comparable cash payouts will narrow down the valuation gap with TCS. We maintain Buy/OW in EAP, with a TP of Rs1,550 at 25x FY23E earnings.
What we liked? Broad-based revenue growth, In-line revenue and EBITM guidance for FY22, robust cash conversion (OCF/EBITDA 88.6%)
What we did not like? Spike in attrition (15.2% vs. 10% in Q3), softness in communications.
Tad softer revenue performance in Q4; FY22 revenue growth guidance at 12-14%: Infosys delivered a tad softer revenue growth in Q4 due to lower contribution from third party sales, offshore shift and usual seasonality. Revenues grew 2.8% QoQ/13% YoY to USD3.6bn. EBITM declined 94bps to 24.5%. Revenue growth was broad based, led by Manufacturing (6.1% QoQ), Retail (3.5% QoQ) and BFSI (2.4% QoQ). Infosys signed 23 large deals with TCV of USD2.1bn during the quarter split across geographies (16 in NA, 6 in Europe and 1 in RoW) and verticals (6 each in BFSI and retail, 3 in Lifesciences and 2 each in communication, manufacturing Hi-tech and Energy, utilities & Resources). Infosys guided for 12-14% CC revenue growth in FY22 on the back of broad-based demand, strong deal intake and healthy deal pipeline.
* EBITM to be in the range of 21-24% in FY22: EBITM declined 94bps in Q4 to 24.5% due to wage hike (-130bps) and higher G&A (-20bps), partly negated by offshore shift, higher utilization and other operating efficiencies. The company has guided for 22-24% EBITM for FY22, considering the impact of salary hikes (Jan’21 and planned wef Jul’21), large deals’ transition costs, likely normalization of travel and related costs in H2. However, revenue acceleration, improving business mix, employee pyramid, offshore shift, automation and other operating efficiencies would help to negate these headwinds.
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