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Strong rebound in EBITM; large deal intake remains robust

Infosys reported strong operating performance in Q2. Revenue was a tad below our expectations, while EBITM beat our estimates. Deal pipeline remains healthy, but considering the macro uncertainties and emerging pockets of weakness for discretionary spending in Hi-tech and Communication apart from Mortgage and Retail indicated earlier, management remain cautiously optimistic. Infosys has narrowed its revenue growth guidance to 15-16% CC (14-16% earlier), implying 0-1.2% CQGR in H2 which reflects seasonal weakness and increased caution amid macro uncertainties. Management has also narrowed its EBITM guidance to 21-22% for FY23 (earlier 21-23%) and expects it to be at the lower end of the guided range. We largely retain our earnings estimates (<0.5% change) for FY23-25 post the Q2 performance. We maintain BUY with TP of Rs1,600/share at 22x Sep-24E EPS, considering continued market-share gains, expected margin recovery, and steady cash generation.

Results summary: Revenue grew 2.5% QoQ to USD4.55bn (4%/18.8% QoQ/YoY CC), a tad below our estimates. EBITM expanded ~150bps QoQ to 21.5%, clocking 60bps above our expectations on account of Rupee depreciation (+70bps), cost optimization measures including large-deal cost optimization, pyramid rationalization, offshore shift, and automation; this was partly negated by lower utilization (+90bps) and lower subcontracting costs (+40bps) partially offset by salary hike for mid-to-senior employees (-50bps). Net profit stood at Rs60.2bn, above our estimate, due to the margin beat. Revenue growth was broad-based and all verticals/geographies clocked double-digit YoY CC growth. The demand environment remains healthy so far, except for pockets of weakness seen in hi-tech and communications in addition to mortgages and parts of Retail. Management remains watchful of emerging the macro situation and its impact on client budgets. Optimization in subcontracting costs, higher utilization, automation, pyramid rationalization, pricing, and cost efficiencies remain the key margin levers that give management confidence about further margin recovery in H2. What we liked: Steady revenue performance, sharp EBITM recovery, large-deal intake of USD2.7bn, the quarterly annualized attrition moderating by 250bps QoQ. What we did not like: Softness in EURS and Communications.

Earnings-call KTAs: 1) Revenue from cloud services was above USD1bn in Q2. 2) Digital revenues comprised 61.8% of the total revenue and delivered 31.2% CC growth in the quarter. 3) Large deal pipeline continues to be strong; however, Management remains watchful of the macro uncertainties. In addition to transformation deals, there is strong focus on cost reduction deals in the pipeline. 4) Infosys signed 27 large deals with combined TCV of USD2.7bn (54% net new) in Q2, split across geographies (18 in North America, 6 in Europe, 1 in India, and 2 in RoW) and verticals (5 in BFSI, 4 each in Retail, Communications, EURS, and Hitech, 3 in Manufacturing, 2 in Life Sciences, and 1 in Others). 5) Management highlighted nil project cancellation in Q2, although Company observed delay in decisionmaking and slowness in discretionary spending. 6) The Communication sector is likely to face some headwinds due to the uncertain macro conditions and the inflationary environment, while the Hitech segment is witnessing increased caution on discretionary spending, leading to delay in deal closures. 7) Company announced buyback of equity shares (through the open market route) amounting to Rs93bn, at a price not exceeding Rs1,850/share. It also announced an interim dividend of Rs16.5/share. 8) Attrition, on LTM basis, moderated to 27.1% from 28.4% Q1. Management further indicated that quarterly annualized attrition declined 250bps QoQ in Q2 and expects it to see added moderation in coming quarters.

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