IGI Logo

Growth leadership though margins disappoint

Infosys’s 1QFY23 earnings report suggest strong revenue growth with Infosys leading amongst the Tier I techs on growth though margins disappointed relative to expectations with a 150 bps sequential drop. Growth was strong in key markets like North America(5% QoQ) and Europe (+7.4% QoQ) as well as picked up sequentially across key verticals like Financial Services , Retail, Manufacturing , E&U. EBIT margins however disappointed , declining by 150 bps sequentially and the lowest since 1QFY20 levels. Net profits missed estimates due to lower margins and higher ETR. INFO raised FY23 revenue outlook pleasantly, driven by 1Q beat though expects margins to be near the lower end of the 21- 23% band(we note that all Tier I techs have missed margin expectations). Company continues to suggest strong pipeline (notwithstanding the macro worsening) and expects margins to improve through the course of FY23. That said, we cut FY22-25E by 2.4-4.7% driven by lower margins even as we appreciate the continuing trend of market share gains/growth leadership. BUY stays TP INR 1,720, based on unchanged 26x June’24E EPS.

* Superlative growth; margins disappoint: Infosys reported a 5.5% QoQ c/c revenue growth ahead of both JMFe/street(3.7% QoQ/4.4% QoQ c.c) thus seeing an improvement in YoY growth during 1QFY23.EBIT margins however slipped by 150 bps sequentially to 20.1%, lowest since 1QFY20 levels impacted adversely by annual wage increments(160 bps), further increase in subcontracting expenses(+30 bps) and lower utilisation (-40 bps) and continued investments in hiring in addition to slight increase in onsite mix. Net profits missed estimates due to margin miss as well as higher ETR(28.8% V/s 24.7% QoQ). Growth was strong across key markets like North America(+5%QoQ) and Europe(+7.4% QoQ). Amongst verticals, growth picked up sequentially across all the major verticals barring Others segment. Large deal wins however declined by 25% QoQ/34% YoY to USD 1.7 bn. Infosys however continued the investments in talent hiring 21k+ employees on a net basis in 1QFY23 even as LTM attrition was up on a sequential basis.

* Revenue guidance upgrade is a pleasant surprise; margins likely to be closer the lower end of the band: INFO raised it’s FY23 revenue guidance to 14-16% (V/s 13-15% earlier) driven by 1Q beat. Revised guidance implies a 1.5-2.6% CQGR through the course of FY23(as compared to 2.6-3.4% earlier). However company now expects margins to be closer to the lower end of the 21-23% band even as it expects to see benefits of utilisation improvement, pricing leverage , pyramid optimisation along with moderation in subcontracting expenses to aid margins going forward.

* Margins drive 2.4-4.7% EPS cuts; appreciate Growth leadership: We appreciate Infosys for continued growth leadership/market share gains(note that Infosys led peers on growth through FY20-22 and is likely to sustain that into FY23). However 1Q miss drives lower margin assumptions and hence 2.4-4.7% EPS cuts even as we raise revenue growth assumptions a tad even after accounting for additional cross currency headwinds. BUY stays, TP INR 1,720 based on unchanged 26x June’24E EPS. HCLT and INFO remain our preferred picks amongst Tier I techs.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

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