IGI Logo

Robust revenue guidance keeps us positive…

Infosys’ volume in the quarter increased 4.6% QoQ but revenue growth was lower by 2% QoQ in constant currency (CC) terms due to offshoring. The revenue growth was across verticals & geographies. Digital revenues increased 5.6% QoQ, 38.6% YoY and now accounts for 51.5% of overall revenues. In terms of deal pipeline, it increased 27.3% YoY to US$2.1 billion. Further, despite wage hike, margins were healthy. In terms of guidance, the company expects FY22E revenues to grow in the range of 12-14% with operating margin in the range of 22-24%. Robust revenue guidance points at strong demand environment.

Improving IT spend, large deal momentum key positive

We expect IT spends to improve led by cloud migration, increased spend by companies in customer & employee experience (P&L led investment) and ancillary technologies like AI, IOT, data analytics. Infosys is in a sweet spot to capture this growth considering the investment it has made in digital technologies. This, coupled with an increase in outsourcing in the US and Europe, vendor consolidation opportunities, captive carve outs and cost take out deals will further boost its revenues. In addition, Infosys has executed well on large deal conversion that is expected to be a key driver of revenue growth in the long run. Hence, we expect the company to register 13.8% CAGR in dollar revenues over FY21-23E.

Margins to remain healthy in coming years

The company believes there will be margin headwinds in FY22E led by lower utilisation, higher travel cost, large deal transition cost and phased wage hike starting from July 2021. Hence, the company has guided for 22-24% margin guidance for FY22E. However, we believe with many levers (like offshoring, revenue growth, pyramid rationalisation, rupee depreciation and automation) available to Infosys, the company will surpass the top end of its guidance in FY22E. Hence, we expect margins of 24.2% and 24.4% in FY22E and FY23E, respectively.

Valuation & Outlook

An improved demand environment, traction in large deals, increase in outsourcing in the US and Europe, vendor consolidation opportunities, captive carve outs and cost takeout deals are expected to drive revenues in the long term. In addition, healthy traction in digital revenues, revenue growth outpacing TCS over the past 12 months and margin gap narrowing with TCS are other key positives. This, coupled with healthy cash conversion, robust capital allocation policy and EPS accretive buyback prompt us to be positive on the stock. Hence, we maintain our BUY rating on the stock with a revised target price of | 1,650 (26x P/E on FY23E EPS) (earlier target price | 1,610).

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer